Post image for Episode 61 – Payments Systems in the US – Third Edition – Glenbrook’s Russ Jones

We all know that the evolution of payments systems in the U.S. is accelerating. That’s why Glenbrook has just published the third edition of our book, Payments Systems in the U.S. – Third Edition: A Guide for the Payments Professional, the definitive guide to the how and, in particular, the why of our multiple payments systems.

The third edition addresses that evolution through updated examples and, unique to this edition, a focus on payments innovation in all three payments phases: initiation, funding, and settlement.

Join Payments on Fire host George Peabody and Glenbrook’s Russ Jones as they talk about the new edition, what it covers, and the book’s relationship to Glenbrook’s Payments Boot Camp. Payments Systems in the U.S.? Third Edition is available on in paperback and Kindle format.


Post image for Episode 60 – Where and Why Interchange Optimization Works – CardConnect

Interchange is fundamental to open look card system economics and a mystery to many, especially to merchants who must pay it but don’t perceive any benefit from it. It’s a non-optional component of what the merchant pays to accept cards. It’s one element of the merchant discount fee. Despite the stubborn fact of it, there are ways for some merchants to make sure they pay as low a rate as possible.

Join Angelo Grecco of CardConnect (now a part of First Data) and Glenbrook’s George Peabody for a conversation about interchange optimization, an approach that certain B2B merchants can employ to lower their acceptance costs.

In this episode of Payments on Fire we decode the payments industry terms:

  • Merchant discount fee
  • Interchange
  • Bundled pricing
  • Interchange plus pricing
  • Level II/III data

If you’re new to payments or just need a refresher on interchange, take a listen!


Post image for Episode 59 – B2B Payments are Hot – Glenbrook’s Erin McCune

B2B payments are huge. Taken together, these supply chain payments exceed the gross domestic product. But supply chain payments remain an imperfect art. While consumers pay for one purchase at a time, a B2B payment may cover multiple invoices, each with different commercial terms. Given the amount of data about the payment that’s necessary to crisply communicate between a buyer’s accounts payable department and a seller’s receivables group, it’s no wonder paper checks are still in broad use.

While B2B payments have been resistant to “electronification,” the cloud, the mobile user interface, a new data standard (ISO 20022), and APIs into banks and payment schemes are enabling a renewed effort to streamline B2B payment transactions. B2B payments are hot.

Join Erin McCune, partner in charge of Glenbrook’s B2B practice, and George Peabody as they discuss:

  • How B2B payments are different from consumer payments
  • Why B2B is “hot” once again
  • What market forces are pushing B2B forward
  • Why Faster Payments in the U.S. and around the world could have a major impact on supply chain payments


Post image for Episode 58 – Consumers and Faster Payments – Consumers Union

The Faster Payments Task Force has brought together a broad constituency with the payments industry thoroughly represented. And thanks to participation by organizations like Consumers Union, the people who bring us Consumer Reports, the voice of the consumer has been well represented in determining important evaluation criteria.

Christina Tetreault, staff attorney at Consumers Union, joins Glenbrook’s George Peabody for this podcast discussion on faster payments, the consumer benefits these new approaches could offer, and what to hope for from their deployment in the U.S.


Post image for Episode 57 – The Bumpy Road toward Merchant EMV Adoption – Heartland

Merchant adoption of EMV capability isn’t a done deal in the U.S. Glenbrook’s own estimates show that we’re only halfway there. Few people have as much insight into merchant payment acceptance and the technology that enables it as Larry Godfrey of Global’s Heartland Payments business.

Take a listen to George and Larry’s discussion as they cover:

  • The EMV terminal transition
  • The chargebacks that many merchants have encountered (looking at you, LA)
  • Contactless payments
  • Security and encryption
  • Payment acceptance


Post image for Episode 56 – Consumer Healthcare Payments – BillingTree
Consumer billing payments get complicated in the healthcare space. Co-payments are bigger than ever as are the medical bills. Consumers need prompting to pay and even incentives to get those big bill onto a payment plan. With higher co-payments, smaller insurance payments, and so many patients having to deal with large medical bills, providers need services to take on the revenue management task.
Join Glenbrook’s George Peabody and David Yohe of the billing specialist BillingTree as they discuss the rising importance of consumer payments in healthcare and the challenges of changing property management payments. You’ll hear how an ISO addresses payment industry change. Listen closely and you’ll hear that the ISO’s job isn’t easy.


Post image for Poor, Wanting and Without: The Payments Gap

Over the past several years, I have focused my time and energy on projects aimed at increasing financial inclusion in developing countries to help alleviate poverty. I feel fortunate to work in this arena; I find it both rewarding and interesting.

Recently, as part of a project, I interviewed a number of people working on financial inclusion efforts in their home country. Time and time again, interviewees cited, and you could feel, their passion on the subject.  They want to improve access to financial services within their country, believing that increasing financial access would have a profound positive impact on their friends, peers and country wo(men).

Humbled by the responses, I started to reflect on how those in similar circumstances have fared in my own backyard, the United States. Here’s what I found:

Poor, Wanting and Without in the U.S.

According to the United States Census Bureau, the official poverty rate in 2015 was 13.5%. (Poverty thresholds are variable and determined by the number of persons in a household. A single person under 65 years of age was considered living in poverty if he/she made less than $12,331/year). Though poverty averages continue to decline in the US (thanks to a number of robust efforts by the government, NGOs, and the private sector), a significant number of counties still experience poverty rates of 20%+ (see map below).



Fortunately, there are effective mitigations that can decrease poverty rates. Perhaps the most fundamental are programs to improve access to financial services. A number of studies have shown that such access helps to alleviate poverty. For example, a 2015 study by the Asian Development Bank, ‘Financial Inclusion, Poverty, and Income Inequality in Developing Asia’ discovered that ‘financial inclusion significantly reduces poverty; and there is also evidence that it lowers income inequality.’

A recent Science Magazine paper by Suri and Jack representing MIT and Georgetown University, respectively, titled ‘The Long-run Poverty and Gender Impacts of Mobile Money’’, makes the case that “mobile money (or digital financial services) has increased the efficiency of the allocation of consumption over time while allowing a more efficient allocation of labor, resulting in a meaningful reduction of poverty in Kenya”.

The McKinsey Global Institute outlined the impact digital finance could have in the developing world, illustrated by the following diagram:

Comparing Access Rates to Financial Services

So how is the US doing at providing access to formal financial services? According to the Federal Deposit Insurance Corporation (FDIC), in 2015 7% of households in the US were ‘unbanked’, meaning the household has no account at insured financial institution. An additional 9.9% of households were considered ‘underbanked’, meaning the household has an account at insured institution but also obtains financial services and products outside of the banking system.

How does this compare to other G20 countries? The Global Findex reports that in 2014, 93.58% of the US ages 15+ had access to a financial account compared to 99.10% of Canadians, 98.76% of Germans and 96.58% of French (The Global Findex database provides in-depth data on how individuals save, borrow, make payments, and manage risks.)

However, as you may have guessed, in the U.S. the percentage of unbanked and underbanked households increases substantially as income decreases. Nearly 50% of households who earn less than $15K/year are unbanked or underbanked (see graph below).

Furthermore, age, education level and minority status are correlated to financial access:

  • Unbanked rates are higher for younger consumers (13.1% of 15-24 year olds and 10.6% of 25-34 year olds are unbanked compared to 3.1% of 65+).
  • Unbanked rates are higher for those with less education (23.2% of those with no high school diploma and 9.7% of those with a high school diploma but no college are unbanked compared to 1.1% of those with a college degree).
  • Unbanked rates are higher for Blacks and Hispanics (18.2% of Blacks and 16.2% of Hispanics are unbanked compared to 3.1% for Whites, 4.0% for Asians and 11.1% for Other).

Low income consumers continue to primarily use cash: 57% of transactions, by count, for household’s earning less than $25K per year were conducted in cash, compared to 33% for households earning $75K+ per year (see graph below)

Making It Better

So how do we improve access to financial services in the US, particularly for those who live in poverty?

Digitizing payments systems and account access is commonly cited as a catalyst leveraged by other countries working to increase financial inclusion. For example, a report titled, ‘The Opportunities of Digitizing Payments: How digitization of payments, transfers, and remittances contributes to the G20 goals of broad-based economic growth, financial inclusion, and women’s economic empowerment’ by the Gates Foundation, the Better than Cash Alliance, and the World Bank Development Research Group supports and builds on this claim. The report points out that “digitizing helps overcome the costs and physical barriers that have beset otherwise valuable financial inclusion efforts” and that “digital platforms offer the opportunity to rapidly scale up access to financial services.”

The US arguably has strong digital payment platforms, systems that typically require a digital mechanism to access. And the unbanked appear to have access via mobile devices. According to the FDIC, in 2015, almost 70% of unbanked consumers have access to a mobile device and over two in five have access to a smartphone.

How do we take advantage of this opportunity?

We should promote programs, organizations and policies that recognize, and are already seizing upon,  digital as a means to improve financial inclusion and upward mobility, such as the Center for Financial Services Innovation which works to lead “a network of committed financial services innovators to build better consumer products and services” or the Financial Solutions Lab which is a “program that seeks to identify, test and bring to scale promising innovations that help Americans increase savings, improve credit, and build assets.” (listen to Glenbrook’s podcast), or the Consumer Financial Protection Bureau which created “Your Money, Your Goals”, a tool for organizations to help the underserved build financial skills and knowhow.

We should also continue to look to other countries like Canada who have strong rates of financial inclusion across wage brackets for best practices and lessons learned. For example, the Canadian government coordinated with local provinces to integrate financial education into the school curricula to improve financial literacy.

And, finally, we should maintain the awareness that poverty and financial exclusion remain critical issues in the US have profound negative and confounding impacts on those living in poverty as well as those of us who don’t.

These are our neighbors – and this is our country. When those around us need help and providing that help benefits us all, we should do more. Like what, you ask? I welcome your ideas and comments.


Post image for Episode 55 – 3D Secure and the IoT – CardinalCommerce

The Internet of Things may be a hot topic but its security isn’t hot at all. Up until recently, IoT device manufacturers and buyers haven’t cared much about security, a disinterest that’s led to over one hundred thousand surveillance cameras being hijacked by Mirai botnet malware. While cameras aren’t making or accepting payments (yet) it’s easy to imagine automobiles paying for tolls and fuel directly. If it’s not my Roku box, maybe it’s Alexa or Google Home that makes payments on my behalf over the IoT. The payments industry is working to get out in front of this potential trouble.

EMVCo tokenization, now expressed in services like Apple Pay and Android Pay, is a leading tool in the payments security kit. 3D Secure. 2.0 services, when used in combination with other security layers, should have a role in IoT payments security, too. Join Tim Sherwin, Co-Founder and CEO of Visa’s CardinalCommerce unit and Glenbrook’s George Peabody in this deep dive into 3DS 2.0, where it works, who pays for it, and its expected role in the IoT.


Post image for Is Amazon Best-in-Class for Online Payments? is in the news all the time with its continued expansion of markets and fulfillment centers, its focus on innovation and long term R&D, and, recently, some very non-intuitive acquisitions. It’s easy to get swept up in their story. But when a company gets as big and powerful as Amazon has become, it’s helpful to step back and see what lessons can be learned. And, of course, we like to do that from a payments perspective.

A big part of Amazon’s success in payments is tied to its scale. Because of its size and the purchase volume it generates, it can negotiate — if not demand — the best rates from payment providers. And it’s scale justifies the development and deployment of features that would only be nice-to-have capabilities for many retailers.

I just said something subtle. I differentiated between its size and its purchase volume. For most companies these are the same thing. A $2.5 billion merchant sells $2.5 billion worth of goods and reports $2.5 billion worth of revenue. Amazon reported 2016 revenue of $136 billion, but it originated a lot more purchase volume than that.

Why is that? Because Amazon uses a marketplace model, its revenue is a combination of what it sells directly and service fees for what its marketplace merchants sell with Amazon’s help. In rough numbers think of third party marketplace merchants adding another 50% of purchase volume to the transactions Amazon processes. The total marketplace volume also doesn’t include the off-Amazon purchase volume that flows through Amazon Pay. That’s incremental as well.

I would be surprised if Amazon didn’t negotiate with third parties from a position of $250 billion in payment volume. That extra purchase volume doesn’t just help drive down processing costs, it also helps Amazon optimize its machine learning algorithms for fighting online fraud. It’s a great model.

From this, what other best-in-class payment techniques does Amazon use?

Reusable Payment Data

Scale also includes 300 million plus active accounts containing default payment data and default ship-to information. The first best-in-class observation is that this payment data is usable across all product lines and all ordering channels. Not just their marketplace, but everything from Amazon Fresh to Woot! It’s usable over Alexa for voice-driven commerce and its usable off-Amazon at Amazon Pay merchants. This seems like a “duh” observation; of course it should be done this way. But think about how many merchants have different, unrelated views of their customers. That’s why multi-channel is such a hot investment area right now. Because many, many merchants don’t have this integrated view.

Localized Payment Processing

For methods of payments, Amazon supports international general purpose cards all over the world – Visa, Mastercard, American Express, Discover, JCB, and UnionPay (credit card only). Most online merchants would support the first four on that list. The additional support for JCB and UnionPay gives Amazon broader payments support to reach global consumers no matter where they are. Payment method coverage matters.

And here’s the best part, and what I consider the second best-in-class observation. Amazon operates 14 worldwide sites and has in-region fulfillment centers for fast delivery to these markets. It does that for commerce reasons. But with a local presence comes the opportunity to process local orders locally instead of cross-border back to the United States. There are multiple benefits from this.

First, when processing locally, Amazon is only paying in-country interchange instead of cross-border fees and U.S. interchange. This a big win because the U.S. market has one of the highest domestic interchanges rates in the world. More importantly, local authorization rates are much higher than cross-border authorization rates. So not only are there more good transactions, they also cost less from Amazon’s perspective.

The second win from local processing is that Amazon now has the ability to accept local forms of payment that are prevalent in the local market — cash on delivery (COD), cash on order (COO), domestic prepaid cards, domestic bank transfers, installment payments –– whatever is prevalent in the local market. Even domestic Amazon gift cards. These local forms of payment are critical for reaching the largest number of potential buyers that may not have access to an international, general purpose card. Or even have a bank account.

Top-Line Enablers

In our Payments Boot Camps we always talk about what motivates and drives users and providers of payment systems to take action. For consumers, it’s convenience and financial gain that most often cause them to change how they use payments. For merchants, it’s getting paid, selling more stuff, and saving some costs — in that order. So what payment techniques does Amazon use to sell more stuff?

Amazon Co-Brand Card

The Amazon Rewards Visa Signature Card was the original enabler to drive more consumer spending on Amazon. What was originally 1% cash back every time card is used has been expanded to 2% cash back for use in select categories (restaurants, gas stations, drug stores), and more recently, 5% cash back for use on if you are a Prime member. That provides plenty of motivation for an Amazon buyer to prefer the Amazon co-brand card on Amazon.

General purpose co-brand cards are known top-line enablers. Not only do they provide more buying power to the customer, they also generate cash back that can only be used with the co-brand partner. These soft dollars make an Amazon purchase decision more obvious because the dollars can be used to offset the cost of the same item on Amazon compared to another retailer. From a best practices perspective, Amazon also does in-checkout-flow application, underwriting, and provisioning of the new card right into the buyers Amazon account. If the buyer is approved, the current purchase (not a future purpose!) can be completed with an Amazon Reward card.

Amazon Private Label Credit Card

The Amazon Prime Store Card is relatively new and has the same benefit to Amazon as the Amazon Rewards Card. This card is targeted at consumers that are more “down market” and may not qualify for the general purpose Amazon Reward Card. Amazon still wants to extend buying power to these customers, but this time it is Amazon-specific buying power as the card can only be used with an Amazon account.

Amazon has taken a page from Target’s playbook and offers 5% cash back (as a monthly statement credit) for Prime Members on any purchase made with the card. It also providers Amazon buyers with access to promotional financing – 6 months on $149 or more, 12 months on $599 or more, 24 months on select high-ticket purchases. Like the Amazon Reward Card there is an instant credit decision, plus the Amazon customer gets a $40 Amazon gift card on approval. This is not a general purpose card and Amazon does not pay interchange on its use. Any purchase that is financed with the Amazon Prime Store Card likely has very, very attractive economics to Amazon. Not just on the incremental payment transaction but probably on some part of the interest earned by the issuer of the card if the consumer revolves.

Amazon Corporate Credit Line

This is another variation of credit extension (net 55) to drive incremental sales. In the case of the Amazon Corporate Credit Line, the incremental sales comes from libraries, schools, government institutions, and large businesses. Small-to-medium size business also have the option to revolve their purchases.

This is a good example of how support for payment methods can be segmented by buyer type. In addition to the credit facility, Amazon also supports the identification and linking of primary and secondary Amazon accounts so a business could have a single Amazon Corporate Credit Line that is accessible by multiple employees inside the company. Once again, providing buying power and spreading it across them maximum number of customers.

Amazon Gift Card

This closed loop, private label card is sold both in store at the gift card mall and sold online directly by Amazon. Amazon customers get 5% cash back on the first $100 load, and 2% cash back on all subsequent reloads for $100 or more from a debit card or a bank account. For customers that don’t qualify for Amazon’s various credit-oriented reward products, this is an attractive way to enjoy ongoing discounts from Amazon — further locking in the customer to buying on Amazon.

From Amazon’s perspective, these are Amazon-specific funds being held by Amazon (in a pooled bank account) that have all sorts of wonderful characteristics. The Amazon Gift Card gives them access to the unbanked that can now use cash to obtain online Amazon spending power at the convenience store. It has the well-known gifting “overspend” characteristic when actually given as a gift. And it provides a handy way for Amazon to refund and reward customer without encountering any real-world transaction cost. More on this later.

To illustrate how merchants can push this type of product for the maximum benefit, Amazon has an allowance program for minors based on the parents being able to auto-reload gift card balance for their kids. There is also a bulk order program for corporate customers, so the gifting effect can be amplified across the whole office or company.

Pay with Points

Originally, Amazon’s Pay with Points enabled their own Amazon Reward Card customers to spend their reward points on Amazon. But in recent years, partnerships with AmEx, Chase, Citi, and Discover have extended this even further so that the billions of dollars in reward points tied up with four of largest credit card issuers in the U.S. can now be spent on Amazon.

While not the only merchant with Pay with Points partnership, Amazon’s selection and scale make it an obvious choice for any cardholder that has a backlog of points they would like to use. It effectively lowers the perceived cost of goods while creating incremental sales and ongoing loyalty to Amazon. It’s hard to say what the private economics are to Amazon when the buyer pays with points.

Bottom Line Enhancements

Not all payment related are focused on incremental sales. Some are focused on reducing the payments cost basis for Amazon without driving incremental sales.

Refund to Amazon Balance

One of the simpler techniques leverages the Amazon Gift Card. When a customer asks for a refund, Amazon will ask the customer whether they would like the purchase refunded back to the original method of payment or refunded back to their Amazon Balance for use on a future purchase.

A refund back to the original method of payment has real world cost. Amazon would get the original interchange back, but would still have to pay transaction fees on that refund. A refund to Amazon Balance has no real-world transaction costs for Amazon — on the refund or on the next subsequent purchase that uses Gift Card Balance.

Lowest Cost Debit Card Routing

Another cost reduction technique available in the U.S. market is to route the purchase across the lowest cost debit card network. By law in the U.S. (Regulation II) every debit card in the nation is required to have two unaffiliated routing paths back to the issuing bank. In practice, this typically means a Visa/Mastercard routing path and a non-Visa/Mastercard routing path.

For Amazon, they have negotiated PINless Debit network routing agreements with NYCE and STAR to complement the normal Visa and Mastercard routing paths. By default, Amazon will route purchases in the U.S. made with a debit card over the least expensive debit card network for that transaction. Amazon provides its customers with the ability to opt-out of that non-standard routing path, but I suspect not many have done so and likely have little understanding of debit network routing paths.  

Amazon Currency Converter

The Amazon Currency Converter is Amazon’s dynamic currency conversion offering that helps cross-border customers buying across markets lock in their actual cost without having to wait to see what the card networks set as the conversation rate when the transaction clears. In addition to helping the customer have some certainty about what a purchase costs, this offering also gives Amazon an opportunity to participate in the currency conversion revenue. This is likely not a revenue center inside the company, but perhaps helps offset some of the cross-border transaction cost on international orders.

Reduced Checkout Friction

Amazon has also given a lot of thought to techniques it can use to reduce friction inside of checkout and maximize the chances that the order successfully completes.

The most obvious example of this is the original 1-Click checkout model that Amazon developed almost 20 years ago. This model draws on the idea that repeat customers have already established their default payment method, default shipment method, and default ship-to address. Instead of going through the normal checkout flow to review and validate every step, Amazon just provides the ability to buy with a single click.

This is an obvious example of reducing checkout friction. But there are some other subtle techniques that Amazon uses in the checkout flow that speak to what they DO NOT DO when compared to perceived best practices in checkout.

First, they don’t ask the customer for the CVN2 number off the back of the card. The CVN2 is used by many online merchants as another data point in the order acceptance risk assessment. “If you were the real cardholder, you would have the card, could read the CVN2 off the back, and could type or tap it into the checkout flow”. Whether or not that number matches what the issuer believes the number to be becomes part of the risk assessment. Amazon does not ask for the CVN2. Asking for this number is an enormous point of friction in the checkout flow, it contributes to cart abandonment, it’s not required in any way. Of course, their scale and data analytic smarts give them other ways that can risk manage online orders without having to resort to friction inside the checkout flow.

Second, they do not do a real-time authorization inside the checkout flow. This is more of a philosophical point than anything else. Amazon’s belief is that most customers are good, and that good customers should not be burdened with processes designed to weed out occasional bad customers. So when a customer places an order there is no authorization delay, there is no “do not hit the back button” messaging, there is just a simple “thank you” message from Amazon to the customer. If it turns out the purchase can not be authorized, a good customer is delighted to go back to the Amazon account and update the card data on file.

Inside the checkout, Amazon will also help customers split funding between a gift card balance and a secondary funding source in order to provide the full order funding. To make the checkout process as slippery as possible, Amazon also offers “Amazon Households” so that members of the same family can share credit cards and debit cards across linked Amazon Accounts.


Our analysis shows that are many payment techniques used by Amazon that could be considered best-in-class. Others are doing interesting things as well, but is a great example of a global online merchant hitting on all cylinders in their approach to payments. The key takeaways for us are:

  • Use a global approach, but localize it for key markets if possible
  • Maximize payment alternatives to expand market coverages
  • Focus on cash back and savings – make it financially rewarding for customers
  • Look for opportunities to trim cost  – but transparently and not at the cost of impacting top-line sales
  • Focus on reducing purchase friction – make it convenient for a customer to buy

What do you think?

If you have enjoyed this dive into how Amazon approaches payments, you might consider a Glenbrook Private Boot Camp. Our experts can come to your site for a two-day or one-day workshop designed to help you understand how payments systems work and how key developments in the industry might be leveraged for your organization.

In addition to covering some leading edge topics as tokenization, faster payments, and cross-border processing, we can also draw on case studies on PayPal, Square, Stripe, Alipay, Apple, and the Faster Payments service in the U.K.


Post image for Episode 54 – Securing IoT Payments – Gemalto

The Internet of Things (IoT) will bring us a tsunami of network-enabled devices, for consumer use as well as yet to be imagined industrial and commercial applications. Many of these devices will be payment enabled, many using card payment rails. Securing those billions of IoT devices is going to require techniques deployed by the mobile industry, the card industry, and other sectors. Cryptographic hardware will be part of the solution.

The answers, of course, will include multiple methods and modes, all chosen based on risk and cost. Join Gemalto’s Jack Jania and Glenbrook’s George Peabody for a discussion on the broad world of IoT device security and how payments intersects with this new and enormous category of devices.


Post image for Episode 53 – India’s Payments Innovation Scene – Glenbrook’s Allen Weinberg

Bringing electronic payment capability to small merchants is a major hurdle for multiple developing economies. In this Payments on Fire podcast with Glenbrook co-founder Allen Weinberg and George Peabody, we discuss merchant enablement in markets reliant on 2G wireless and feature phones. We take a deeper look at India’s payment evolution in particular. Allen’s observations come from his recent work in India and the insights into payment system success factors he’s developed. Take a listen!

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Post image for Episode 52 – Innovation for the Underserved – FinLab

Bringing payments and financial services to those of us with a tenuous connection to the banking system is the goal of the Center for Financial Services Innovation. FinLab, a joint effort by the CFSI and JPMorgan Chase, is a five year effort, now in its third year, that’s using a competition for funding and business support to broaden American financial services options.

When nearly half of Americans don’t have $400 ready money, better financial management tools can help. Join FinLab’s Managing Director, Ryan Falvey and Glenbrook’s George Peabody as they discuss the FinLab mission, its process, successes, and what Ryan hopes to see next.


Post image for EMV’s First Phase in the US at an End; the Wait for Phase 2 Begins

Despite our industry’s preoccupation with mobile payments, here at Glenbrook we’ve been keeping a sharp eye on the state of the U.S. EMV® migration. Let’s call the U.S. approach, based on contact EMV only with no PINs on our credit cards, EMV Phase 1. That’s where we are today. While EMV technology has been settled science for some time, the velocity of the U.S. transition has implications not only for EMV providers and users but for the mobile payment ecosystem as well. Just to level set, EMV Phase 1 looks like this:

Asymmetric Deployment

Anyone who uses payment cards recognizes that there are significant differences in how chip cards have been issued and where those chip cards are accepted. I doubt it’s only Glenbrook’s payment geeks who keep a mental tally of which merchants take “the chip” or, for that smaller subset of “Pay” users, accept NFC-based contactless payments. Compared to the good old days of a simple swipe, we’re in an awkward phase where how to pay is uncertain.

Card Issuers

Glenbrook’s latest market scan shows that card issuers are out ahead of the acceptance side by a wide margin with some 81% of credit cards and 46% of debit cards chip-based at the end of 2016. Our forecast gets the U.S. to the vicinity of 100% chip issuance by the end of 2018. That said, the largest issuers have already shifted back to the traditional reissuance and card expiry pace of three years, with some portfolios moving to a four or five year replacement cycle.


Merchant EMV acceptance continues to lag the issuer pace. And no wonder, given the greater difficulties of EMV acceptance. EMV requires the replacement of every POS terminal, the certification of point of sale software that connects to those terminals, and non-technical, non-trivial steps like staff and customer education. (A significant proportion of our recent merchant work has focused on EMV deployment concerns, on topics ranging from optimized payments infrastructure, transaction speed, and data security.)

Glenbrook’s forecast for U.S. merchant chip acceptance gets us to 90% chip acceptance no sooner than Q4 2019. At that point, we will have reached the important milestone of 90% of transactions executed chip-on-chip, where both the card and the POS terminal conduct an EMV-based dialog.

If we make that schedule, the U.S. migration, despite all the sturm und drang, will outpace the rate set by other markets that have historically required six years to complete. Not bad for the biggest POS market with the most legacy gear.

What Does Phase 2 Look Like?

We’re frequently asked “what’s next for EMV in the US? What about contactless card issuance? Any chance of putting a PIN on a credit card?” Those are, as they say, good questions.

Before we go there, let’s back up a bit. We have to thank Apple’s launch of Apple Pay, coincident with the U.S. EMV rollout, for giving a big push to the expansion of the U.S. contactless acceptance footprint. Because every payment terminal was headed for replacement to support contact EMV and the incremental cost of contactless support had dropped to a matter of a few dollars, the POS terminal base is now set on a path toward ubiquitous contactless ability if not acceptance.

But we’re not even close to that ubiquity. Contactless activation lags EMV contact acceptance by some 30%. While not necessarily turning off contactless payments (yes, CVS has), some large merchants like Walmart and CVS have opted for their own wallet apps using QR codes at the POS for the richer data this method provides. Compared to payments-focused wallets like Apple Pay and Android Pay, these commerce-focused merchant apps attempt to improve the customer experience and to help the merchant sell more.

A broad merchant contactless acceptance footprint awaits. While 100% of new EMV POS terminals ship with contactless hardware, today we estimate only 70% of EMV-enabled terminals—and as of Q1 2017 those are just 43% of all POS terminals—have contactless acceptance turned on.

Not on their Screen

Card issuer competitive differentiation remains based on rewards, perks, rates, and cachet, as the current metal card infatuation demonstrates. The dual interface contactless card’s role as a differentiator is waiting on a compelling, everyday use case. My theory is that, while Chicago’s Transit Authority has made open loop payments possible at the turnstile, there aren’t enough bankers living in that market to stimulate issuance. Once the New York MTA goes open loop and all those bankers see what’s possible, then dual interface issuance will happen in a New York minute. But that’s going to take until 2020 which also corresponds to the time when the first wave of EMV cards hit their expiry dates. Then Phase 2 will occur, the second issuance wave. We’ll have to wait until then for the release, if any, of new features such as dual interface contactless, PIN-protected credit cards, and perhaps (but very unlikely) offline authorization.

NFC Pays and Dual Interface Cards

NFC-based payments have a long way to go. While the growth rate for Apple Pay and Android Pay transaction volumes is impressive, it remains minuscule in the overall payment mix, below 2% even at tonier merchants like Whole Foods. While it’s prudent to be cautious with such stats (in some markets, Apple Pay and Android Pay usage is higher) a recent Wall Street Journal article pointed out that “Apple Pay Promised to Make Plastic Obsolete. Then Came Wary Shoppers, Confused Clerks.”

What about cards? A glance to our north demonstrates Canada’s success with contactless cards. 100% of Mastercard-branded cards are contactless. Major retailers accept contactless. Interac’s Flash contactless debit cards are issued by BMO, RBC and Scotiabank and over 170 credit unions. Across the pond, UK cardholders and merchants are pushing contactless card usage rates; Londoners use contactless for some 30% of transactions.

Questions for the U.S. include:

Could contactless cards be the training wheels for NFC payments in the U.S? Should those examples guide our expectations for the U.S.? We’ll have to wait and see, but if anything makes a contact EMV transaction look better, it’s a contactless, tap-and-go payment.

Are U.S. issuers hoping mobile wallets catch on so they can skip contactless card issuance, and its higher cost, altogether? Or are they just waiting for a major competitor to add contactless capability to its card offerings? On those questions, the jury is out and we expect a lengthy deliberation to conclude towards 2020.

The New Normal

Of course, physical world payments continue to diminish as a portion of our overall transactions. For issuers, a huge question is how to gain and maintain “top of the digital wallet” position. In today’s digitally mediated world, where subscriptions for goods and services (Dollar Shave Club, Netflix) are assuming a larger share of overall transactions, the card or payment method that’s on file with the merchant might not change for years. Dominance in digital payment channels is on every issuer’s agenda. But that’s a discussion for another post.

I welcome your comments and thoughts!

EMV is a registered trademark in the U.S. and other countries, and is an unregistered trademark in other countries, owned by EMVCo.


Post image for Episode 51 – Unravelling the Payments Data Hairball
Payments transactions generate plenty of useful data for merchants. But wrangling that data into informative shape gets challenging, especially when multiple acquirers, gateways, processors, or other service providers are used. Each one has a different approach to reporting and some are (much) better than others. Developing a consolidated view and, as important, reconciling financials from different sources is a time consuming task for staff who need timely data on multiple concerns.
Addressing this data hairball is payments analytics company Pazien. Take a listen to  Pazien CEO and co-founder Jason Pavona and George as they discuss what the company does as well as reliability strategies for website operators.


Post image for Episode 50 – Internet identity, privacy, and a blockchain – SecureKey

The term identity gets used a lot whenever internet payments and security are discussed. Knowing who we transact with is still the knotty problem. Strong authentication is required. Identity verification is required, too. A means of sharing the fruits of that work among the parties involved, especially those taking on risk, could save everyone a lot of cost and effort. That’s the notion behind federated identity and other means of securely sharing identity attributes without undermining privacy.

That tall order is the subject of this podcast with Andre Boysen, Chief Identity Officer of SecureKey. Join George and Andre as they talk about trust on the internet, SecureKey’s approach, and the company’s use of blockchain technology via a partnership with IBM.


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