A number of us self-proclaimed “payments geeks” awoke this morning to learn of Visa Inc’s intention to purchase CyberSource for approximately $2 billion.  Over the course of the day, Glenbrook’s been getting a flood of emails generally asking, “What’s the REAL reason Visa’s buying this big gateway company?”

Before I go on any further, it might be helpful if we step back for a second and briefly describe what payment gateways do and why nearly all eCommerce and some physical world merchants use them.

It’s probably easiest to just think of a payments gateway as hosted middleware that sits between the merchant and its acquirer’s systems.  Merchants use gateways for a variety of reasons, including:

• Merchants can access a number of value-added services specific to eCommerce, such as fraud prevention, shipping tools, and sales tax calculators through a single connection (a big deal for merchants) and via a single relationship;
• Many eCommerce shopping cart/store builder applications come with gateway connections pre-installed, making it much easier for smaller merchants to connect to major (and often minor) payment systems;
• Gateways allow merchants to switch acquirers quite easily, without any meaningful front-end systems changes (the gateway merely re-points the transactions to the merchant’s new acquirer);
• Gateways reduce the complexity in accessing payments systems beyond the merchant’s own borders (e.g., a U.S.-based merchant can connect to its acquirer in the UK or Germany without having to establish and maintain separate interfaces); and
• Gateways can also facilitate the process of incorporating new and alternative forms of payment on the merchant website (think PayPal, etc.).

So, back to Visa. The first thing I’d point out is that Visa stated its intentions to get into the gateway, and other merchant processing businesses, in its last investor call back in March.  That’s not to say that a lot of us weren’t surprised at a $2 billion dollar acquisition by Visa – it’s definitely a lot of money, but let’s not dwell on that right now.

The big question is whether getting into the gateway business makes sense for Visa?  In my opinion, absolutely!  For a number of years now, many of us at Glenbrook have been advocates of how strategic the gateway business could be.  For payments systems themselves, a large gateway provides them with somewhat more control than they otherwise would have, which is typical with vertical integration plays.  It also provides Visa with some key components of core and more value-added acquirer back office processing, such as:

• Truly enhanced fraud prevention tools (Visa and other payment system providers see much more data at the macro level than anyone else, but thus far have been largely absent from offering merchant-centric fraud prevention tools);
• The ability to provide a packaged offering to merchants around the world that would streamline their path to eCommerce sales (U.S. merchants have dominated eCommerce to date, but as in most areas, that is poised to change);
• Tokenization solutions for PCI compliance;
• The ability to support “end-to-end” encryption from physical POS devices (maybe they can be the first to turn what’s really “point-to-point” encryption into true “end-to-end”); and
• Chargeback processing.

One less obvious and perhaps more interesting point:  both Visa and MasterCard have been promoting their merchant direct-connect offerings for a while now (i.e., the merchant puts a Visa or MasterCard server in their data center and routes authorization requests directly to Visa/MasterCard, bypassing their acquirer’s front-end auth systems).  In theory, CyberSource could do the same, although it could be putting its acquirer relationships at risk in the process.  We’ll see what happens a year or two out.

Of course, as a gateway provider, CyberSource must continue to support products and payment systems that compete directly or indirectly with Visa, both within the US and beyond (e.g., e-checks, PayPal, MasterCard, Bill Me Later, ELV in Germany, etc.).  If they disadvantage competitors’ offerings, their value to merchants will be severely diminished and they’ll quickly lose volume.  Having said that, Visa clearly understands and acknowledges that.

All in all, this is clearly a big deal for Visa and the payments industry.  The gateway space is certainly heating up!

Related articles:

1. MasterCard Acquires DataCash – Game On!
2. Merchant Risk Council’s Platinum Day – Morning Sessions
3. A Perspective On Intuit’s Acquisition Of Digital Insight

Internet Retailer recently published the 2009 Edition of its Top 500 Guide, which provides profiles and statistics on “America’s 500 Largest Retail Web Sites”. eCommerce professionals look forward to its publication every June not only to see the relative rankings of the online retailers, and to also pick apart the shifting dynamics of the industry.

Over time, and to its credit, Internet Retailer has expanded the type of data it collects or assembles on each retailer, and is now providing online access to its databases to subscribers. They recently started profiling which payment types — or tenders — are accepted by each merchant.

This year Glenbrook decided to use the raw data from the 2009 edition (which captures all of 2008) to do some tender type analysis and see what we could learn about acceptance trends. Internet Retailer publishes data on the Top 500, but makes a big deal out of the significance of the Top 100 online retailers.

The 2009 report says that the Top 100 generated $98.6 billion in merchandise sales, which is 55.4% of all eRetail sales in the US and up 12.4% year-over-year from 2007.  Our analysis shows that this group represented 52.8% of all eRetail sales in 2007, so in spite of the long tail, online purchase volume continues to shift towards major merchants. To simplify our tender type analysis, we only looked at the Top 100.

TenderType

(click for full size image)

For those of you that have been following the evolution of the eCommerce market, the results shouldn’t be too surprising. Here’s how we interpret the numbers.

Visa and MasterCard are the gold standard in online tender type acceptance, so there is no surprise that they are accepted by every merchant in the Top 100. American Express and Discover have both done a good job with acceptance and are now on par with Visa and MasterCard acceptance in the top tier of online retail. It’s amazing, actually, that there are still one or two retailers in the Top 100 that don’t accept American Express and Discover.

In what may be a surprise to some, private label credit cards continue to be a force in this segment of the market with 56 of the Top 100 merchants currently managing their own private programs.  These merchants often use private label credit as a way to offset bank card interchange, and as a platform to extend their own promotional financing. Internet Retailer data says that 40 retailers in the Top 100 offer deferred payments. They aren’t clear about the definition they are using, but our guess is that they mean 40 of those 56 merchants also offer promotional financing with their private label credit cards.

Some people may be surprised that 48 of the Top 100 eRetailers accept stored value cards (aka gift cards) as payment. But you have to remember that many of the most successful online merchants are also successful offline merchants, and have the ability to distribute gift cards through their own retail outlets, as well as through the ubiquitous gift card malls.

The data also shows that 35 of the Top 100 retailers accept PayPal. The raw data broke down PayPal acceptance by product, which was intriguing to us. The report indicated that 17 of these 35 retailers were using PayPal Express Checkout. We can only speculate that the other 18 were using PayPal Website Payment Standard. This was somewhat surprising since Express Checkout is positioned as the PayPal product for top tier merchants.

Bill Me Later acceptance, by 31 of the Top 100, is roughly the same as PayPal acceptance. Given that PayPal now owns Bill Me Later, the company is well positioned as the de facto alternative payment provider for online merchants. PayPal makes a big deal out of how complementary PayPal and Bill Me Later are, so we looked more closely at acceptance data. 21 of the merchants reported accepting both PayPal and Bill Me Later, which indicates to us about a two-thirds overlap with the Top 100 eRetailers. It also speaks to the relationship PayPal now enjoys with large merchants, as about half accept either PayPal or Bill Me Later if not both.

Looking at the acceptance of all tenders across the Top 100, 87% of the Top 100 accept a form of payment other than the main four payment card tenders. 72% took at least five types of tenders — the four main tenders plus one alternative.  On the far end of tender types diversity, 11% of the Top 100 took at least 8 different types of tenders.

A couple of final thoughts. It’s always important to understand the context of any analysis. The Internet Retailer Top 500 report is focused on the eRetail segment of the eCommerce market. It doesn’t cover other eCommerce segments such as travel, digital content, online services, etc. A complete market analysis of eCommerce merchants would have shown a different mix of tender types. UATP, for example, would have made the list due to its prevalence in the travel industry.

The Internet Retailer report is also specific to online retailers based in the United States. Our analysis at Glenbrook indicates that about 60% of the global eCommerce market is now outside the United States — and tender type acceptance (and acceptance strategies) vary greatly country-to-country. Helping online merchants sort out their global acceptance strategy is one of our main practice areas at Glenbrook, so we can say first hand that the acceptance trends look very different in many markets. But it’s good to have the US-specific acceptance and we commend Internet Retailer for gathering the data and making it available to the industry.

Related articles:

1. Glenbrook Research: Credit Card Acceptance for B2B Payments
2. It’s the Online Holiday Season!
3. Glenbrook’s Payments Systems and Domains Analysis

Last week, Visa reported its second fiscal quarter financial results – and included a mention that Visa’s US debit card purchase volume in the fourth calendar quarter of 2008 slightly exceeded that of its US credit card purchase volume ($206 billion vs. $203 billion).

Today, in another press release, Visa reinforced that point.

Six years earlier, in 2002, the transactions on Visa debit cards in the US exceeded the transactions on Visa credit cards for the first time.

In fact, purchase volume on credit cards has been shrinking of late – with Fitch reporting today that spend volume at the top six issuers fell an average of 14.2% sequentially in the first quarter of 2009 and 14.0% year-over-year.

Obviously, consumers are increasingly shunning credit cards in favor of using their debit cards. It’s been a long road – from the early days of debit cards in the early 90’s to today. Back then, retail bankers were very concerned about fraud risks on signature debit cards. But, with increasing levels of electronic POS authorizations, many of those risks fell away. The utility of the signature-based debit card – accepted at almost all merchant locations – can’t be beat.

What else is driving increased consumer usage of debit cards? Fewer merchants willing to accept traditional checks? Speed of checkout?

What do you think? Please add your comments below!

Related articles:

1. Re-coupled Debit? The TSYS Hybrid Card
2. Maximizing Your Debit Portfolio [ATM, Debit & Prepaid Forum 2009]
3. A Look at PayPal’s Q3 2008 Financial Results

At Glenbrook, we’re pretty interested in what makes mass consumer adoption of new payments capabilities happen – or not. We’ve been talking lately about “brand as action” – the notion that consumers (and merchants) need a way to express how they are going to pay or be paid.

This can be brand with a “capital B” – “I’ll give you my American Express”, or brand with a “little b” – “I’ll give you a check.” But it has to be something that the consumer understands and the merchant understands. And it has to be something that one consumer can explain to another consumer – even if they bank at different banks, or use different payments services. “I just paid by card” is understood from one consumer to another, regardless of who their card issuers are.

The card brands have obviously been down this track many times, and understandably consider themselves brand experts. But in a way I think they have fooled themselves. The differentiating “capital B” aspect of the MasterCard or Visa or American Express brands is undeniably there, but so is the utilitarian “little b” which comes into play when someone says “give me a credit card” or “I’ll pay you with my debit card”.

I’d argue that the utilitarian “little b” is the grease that has made the gears work. It is an essential component of the large scale, open-loop card networks. The ACH networks biggest successes have come when they have stumbled on “little b” solutions: “direct deposit of payroll” and “preauthorized debit” are pretty generally understood terms. But they have failed dismally on the whole “eCheck” concept: note the following from Amazon’s website:

Payment Methods We Accept

Amazon.com accepts American Express, Diners Club, Discover, JCB, MasterCard, Eurocard, Visa, Visa Check Cards, payment from your bank account, Amazon.com gift cards, Amazon.com Gift Card claim codes*, Amazon Store Card, and Webcertificates.

So it is interesting that when the card networks have introduced important new product capabilities, they have focused on the “capital B” and ignored the need to provide the “little b”.

Here are two examples. One is in the infamous arena of Internet card security. Visa and MasterCard have invested hundreds of millions of dollars and years of work in introducing “Verified by Visa” and “MasterCard SecureCode”. But there is no generic expression that a consumer (or a merchant) can use that covers both (virtually identical) services. Even within the industry, when we talk about it, we stumble over “Verified by Visa or MasterCard Secure Code”. What a mouthful! Let’s say I’m a security conscious consumer, and I’ve signed up for and am using Verified by Visa. I want to tell a friend about it – I start talking about it – she says: “oh, I have a MasterCard” – what do I tell her? Does Visa really think that consumer will say “gee, I better get a Visa”?

So, how are these programs going? Not well, in a nutshell. There are a number of reasons for this – but I think the brand vocabulary issue is a big one.

A newer example is in the whole area of contactless cards. We have MasterCard PayPass and Visa payWave. Two completely different brands for – the same thing! And this a technology that requires a store clerk to be conversant in the whole subject! What conversation do the card networks think is likely to happen between the teenager staffing the 7-11 and the confused consumer with a wallet of cards? Couldn’t the networks at least have quietly collaborated on a “small b” nomenclature for consumers and merchants to use? Admittedly, they did at least collaborate on an acceptance mark:

But how useful is that?
Can a consumer say:

And don’t get me started on the whole confusion over tapping versus waving. I won’t belabor the point – but I think you get my drift.

Not long ago, I hired a consultant I found on the Internet to help me with some computer problems. We had a short, satisfactory business relationship – and I then emailed her, asked her to send me an invoice, and asked her how I should pay her. The answer came right back: “just PayPal it to me”. She understood, I understood: brand as action.

Now ask yourself: if you are an open-loop card network, what’s worse than the failure of a new payment method due to your own failure to provide the market with a “little b” brand? Maybe it’s having one competitor gain mind-share with a “capital B” brand!

Related articles:

1. Google Checkout Adjusts Pricing Upward – Matching PayPal
2. Juicy Payments Reading: “Priceless” by Lloyd Constantine
3. The End of Interchange?

It’s springtime, and annual payments statistics are starting to bloom. A good time, perhaps, to consider the state of business-to-business (B2B) payments. NACHA recently released figures showing that ACH CTX transactions grew by 15% in the fourth quarter, compared to the previous year. Earlier, Visa disclosed that their fourth quarter commercial volume was 13% ahead of the prior year. Nice growth numbers, particularly in these challenging times.

But for those of us with long histories in B2B payments, it’s still not enough. We all know that the bulk of B2B transactions are still made by check. An AFP survey at year-end 2007 showed that 74% of business payments were still checks. The NACHA and Visa statistics tell us things are changing – but why isn’t the transition from paper to electronic business payments happening more quickly? After all, almost all corporate surveys show that corporations – on both the paying and receiving side – see the benefits of electronic payments and intend to implement them. Here’s our view of some of the myths and realities about why movement is slow.

THE MYTHS

“It’s too complicated.” A lot is made of the fact that the B2B payments environment is complex. We don’t disagree. There are complex, interwoven processes, systems, and business relationships. There is messy data. But although this accurately describes the business payment environment, it does not explain why checks persist. In many instances, electronic payments can replace checks without greatly increasing complexity or disturbing current practices. These current practices, by the way, often aren’t all that great. The problem is that many people think that migrating to electronic payments will somehow “solve” the whole complex environment. It won’t.

“The hub controls the spoke.” Many discussions about B2B payments revolve around the myth of the all-powerful customer dictating how it will pay its small suppliers (and occasionally, the reverse: a powerful supplier dictating how customers will make payments). Although undeniably true in some cases, it does not describe most situations. Businesses often have tens of thousands (or hundreds of thousands!) of counterparties. It’s a many-to-many world. Businesses trying to standardize their A/R or A/P processes struggle to meet the demands of a single customer or supplier who demands “pay this way”. Expecting that uber-efficient “hubs will lead all businesses to electronic payments is simply wishful thinking. They won’t make it happen; and they aren’t why it’s not happening.

“Banks are dragging their feet.” This argument holds that banks are making so much money from check payments that they are actively resisting conversion to electronics. Common sense and anecdote both refute this. Bank profits from pure check float are eroding in any event with the advent of image clearing. The real money is in winning and maintaining business deposit accounts – which remains the case when payments are made electronically. Smart banks are figuring out that the lockbox opportunity – capturing and transmitting remittance data – is still there with most electronic payments.

THE REAL PROBLEMS

“It’s all about the money.” The float argument, held against banks, applies more accurately to businesses. But people are again missing the point when they insist that this is keeping the practice of checks in place. The real driver, for payers and receivers alike, is the time value of money. Payers want to control the timing of their cash outflow; receivers want to accelerate collection. Electronic payments do not diminish control over timing; they just alter the mechanics somewhat. Card payments for B2B transactions are gaining vogue in part because some suppliers see this as a tool for more rapid and more certain collection of payments due. Whether this is true depends on the model (there are both buyer-initiated and supplier-initiated card payments) and how it used by the initiating party. The lesson for bankers? Talk about how electronic payments tools can be used in conjunction with terms negotiations and payment policies to advance the cash flow interests of your customers.

“Where’s the phone book?” Checks are awfully easy for the payer – all they need is an address. All other solutions require getting payments details – account numbers, card numbers, etc. from your supplier. Once received, this information needs to be safely stored, maintained, and updated. Imagine: all over America, the same data about an individual supplier’s payment preference is being stored in the vendor master files of their thousands of customers. Why can’t a customer simply look up the payments instruction for a vendor? Surely in this age of Internet databases and data security the industry can find a solution. NACHA is working on it, and the card networks have it – sort of. But don’t we need some kind of cross-payment system solution? Why can’t you look up ACME Widget Co. and find out what kind of electronic payments it supports, and how to make them?

“What’s this payment for?” The remittance data problem, sadly, is all too real. Here are the components of the problem. (1) Getting the data from the buyer (remittance data includes listing of the invoices paid, the amount paid for each invoice, explanations for short pays, and justification for discounts and promotional deductions). (2) Associating this data with an inbound payment. (3) Getting this data into digital, system-readable form. (4) Matching the data receivables data and posting the payment against open balances for the customers in A/R. Checks solve the first two problems by simply putting the document in the same envelope as the check. ACH CTX solves the first three problems, but only 4% of ACH B2B transactions use the CTX data-carrying format. How is remittance data handled for those other ACH (and many buyer-initiated card payments)? Usually, by some form of email or fax. The lesson for bankers: there is a problem here to be solved – and your customers might pay you for it!

The fourth component, A/R integration, is a problem of increasing focus. Glenbrook Partner Erin McCune, who works extensively with corporations on payments integration issues, says “it’s hard to over-emphasize the pain that this problem is causing A/R departments across the country. Initiatives such as the EPN STP 820 will help, but the active cooperation of software vendors is critical. I’m pleased to note that many are making attempts to modify their solutions to ensure that electronic payments – both ACH and cards – can be more easily posted by corporations of all sizes.” And toward the end of next year, when robust remittances come to wires, there will be an opportunity to address those incoming payments as well.

Summary

So now that spring is here, what can bankers – and the industry as a whole – do to encourage the growth of electronic payments? Our advice is to concentrate on helping customers solve the real problems, and not to be overwhelmed by the myths. A case, perhaps, of making sure that we don’t miss the forest for the flowers. Let us know what you think!

Related articles:

1. Payments Milestone: CHIPS is 40 Today
2. Key Take-aways from Glenbrook’s B2B Payments Workshop in NYC Last Week
3. From Check to Electronic Payments: The B2B Outlook [NACHA Payments]

By Bryan Derman

It seems like it’s been a month now that we at Glenbrook – and people all around the payments business – have been holding our collective breath waiting to see what level of purchase volumes would be reported by MasterCard and Visa for Q4 2008.

Well, the results came in the last 24 hours, and while it wasn’t pretty, the numbers weren’t quite so bad as some had feared. In fact, in some ways, they were a mildly pleasant surprise.

Much of the temporary asphyxiation had come from the constant drip of negative news released by big issuers over the last few weeks – Citigroup North American credit volume down 15 percent, CapitalOne US purchase volume down 11%, and BofA debit volume up only 3.5 percent.

If these industry stalwarts were posting these kinds of results, just how bad might the overall industry volumes be, we wondered.

Well, compared to what we were prepared for, the numbers were okay and so we’ve begun to take on fresh oxygen once again.

Specifically:

We should also hasten to point out that we are talking here about U.S. volumes only, and that these are both substantial global companies that posted more favorable results in regions beyond the United States (though one must wonder whether that will persist as the effects of a spreading global recession begin to manifest themselves).

In some respects, these figures really speak to the maturity and pervasiveness of card payments in today’s society. While we believe that cards are still taking share from cash and checks, that well-documented secular shift can no longer readily offset the macroeconomic realities of declining GDP and retail sales. In a country where cards are used to pay for almost everything, it gets harder and harder to grow card volume faster than the overall economy.

In fact, the significant declines on the credit side of the networks’ volume indicate just how economically-sensitive they have become. As consumer budgets have become strained, their efforts to de-lever personal balance sheets and reign in high-ticket expenditures contributed to a disproportionate decline in credit volumes (aided to some extent by credit line reductions from issuers fearful about rising unemployment).

The debit picture was more positive. While 6 percent growth is quite drop from the high-teens to 20 percent growth to which we had become accustomed, it still represents nice outperformance in a quarter where GDP and Personal Consumption Expenditures fell nearly 4 percent (and probably more once final revisions are made). Clearly, debit continues to gain share of consumer payments.

Also, not to be overlooked are two particular sources of headwind. First, comparisons were bound to be difficult in Q4 2008. While the economic gurus recently told us that the current recession actually began in Q4 2007, I remember the 2007 holiday season as relatively buoyant, with major worries confined to the travails of a few overextended homeowners in California, Florida and Nevada. By contrast, we were deep in the doldrums in 2008 by the time frost appeared on our pumpkins (Lehman Brothers made its Chapter 11 filing on 9/15/08).

Second, the precipitous fall in gas prices takes a heavy toll on card payment volume. Speaking in round numbers, the price of gas in Q4 of this year hovered in the range of $1.75 per gallon, roughly the half the level of a year earlier. In a category that represents 6-10 percent of total US card payment volume, that sort of price decline will always leave a mark.

We’ll close by noting (at least anecdotally) that the smaller institutions may have fared better than the behemoths this past quarter. Perhaps the relative absence of concerns about subprime mortgages, credit default swaps, and TARP funding allowed them to maintain better focus on the boring but dependable business of payments.

Of course, next quarter is only three months away and we’ll have to see what happens then….

How Glenbrook Can Help

Can Glenbrook help you interpret and respond to the latest trends in card payments?

Also, Bryan will be teaching the world of card payments at our upcoming Glenbrook Payments Boot Camp in New York City on March 10-11, 2009. Online registration is OPEN.

Related articles:

1. Debit Wins…Why?
2. A Look at PayPal’s Q3 2008 Financial Results
3. Remote Capture Grows and Grows