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Card Payments Have Surpassed Cash… That’s Good, Right? (Part 2)

Post Categories: Blog

By: Dan Frechtling, SVP of Marketing and Chief Product Officer 

 

Consumer card transactions overtook cash payments for the first time in 2016, according to Euromonitor. This was before India’s demonetization announcement, which pushes the needle further as the world’s second most populous country shifts away from cash and in favor of card and digital payments.

 

Moving away from cash and checks is a signal of modernizing economies, more efficiency and less fraud — in a conventional sense. But as card payments grow, so do card crimes.

 

In part one, we looked one driver of increased non-cash transactions, e-commerce growth. In part two, we examine alternative aggregators, which act as agents to bring more merchants into the payments system (see Figure 1). However, for all the velocity that comes when businesses have easier access to electronic payments, there is drag from bad actors seeking to exploit the system.

ecommerce-growth

Figure 1: Growth drivers of card payments. 2011-2015 data courtesy CapGemini

 

Driver #2: Aggregators create options for merchants and hazards for risk and compliance teams

New forms of “nonbanks” add new links in the payments chain and new conveniences to merchants. But as the saying goes: a chain is only as safe as its weakest link. Understanding traditional Third-Party Payment Processors (TPPPs) and new aggregation models and paints a more complete picture.

 

First there are TPPPs, which allow businesses to receive and send payments access more easily, come in many forms. Traditionally they served brick-and-mortar businesses, but have expanded broadly into online businesses as well.

 

They offer several benefits:

  • TPPPs are usually faster at setting up merchant accounts. There’s less paperwork. This can be a great advantage to new businesses.
  • In some situations, TPPPs can even be cheaper than establishing a direct account with a bank.
  • They provide services such as integrated payments that package together multiple types of payments (e.g. credit and debit cards, gift cards, electronic checks, ACH, etc.).

 

TPPPs pose liabilities as well. Rogue or non-compliant TPPPs can allow harm to consumers and processing banks. A North American TPPP was sanctioned in September for laundering money from mail fraud schemes involving lotteries and psychics. Scams targeted elderly, duping them into sending in processing fees for large winnings that were fictitious. One 91-year-old widow was tricked into writing 749 checks, or over $29,000, in a year. Most of the checks were sent in response to fake award notices and personalized letters promising financial fortune.

 

The Consumer Financial Protection Bureau (CFPB) in the US filed a lawsuit in June against a TPPP that facilitated unilateral payday lending. In this scam, a consumer provided account information to multiple lenders to get the best rate. Predator firms took the account information and covertly deposited money. After making the deposit, the fraudster emailed a “contract” to the consumer. With a fictitious “loan” in place, the fraudster regularly debited the accounts in amounts that sum up to several multiples of the original loan.

Implication: Processors, like banks, are expected act as an extension of law enforcement.  FIs and processors need to regularly review the operations and reputation of their underlying business customers. There are federal and state regulators in the US that prosecute FIs that they believe turned a blind eye.

 

pros-cons-alt-aggregators

Figure 2: Pros and cons of alternative aggregators

 

New services get businesses online faster, but also help fraudsters act faster

While TPPPs are well-established, there is also a new proliferation of digital aggregation models that provide new ways to sell and to get paid, in the US and elsewhere. As stated by payment consultancy First Annapolis, Payment Facilitators (PFs), Marketplaces, and ISVs will drive over half of future acquiring growth in the US, yet are only about 10% of the market today.

 

Here they are defined:

  • PFs are aggregators of sub-merchants, aka merchants of record, and have been newly sanctioned by the card networks.
  • Marketplaces are aggregators with additional services, bringing together buyers and sellers like eBay and Uber and serving as the brand of record, so to speak.
  • ISVs develop business software into POS solutions. Historically, they’ve left payments to acquirers, but now they are forward integrating.

 

Players in these three segments also tend to be focused on certain verticals.  The 10% of providers represented here bring an enhanced customer understanding to their clients. This is another reason why they are growing 10x as fast as the incumbent 90% of traditional POS terminals.

 

But with the pros come cons. This proliferation of new models, if unmonitored, also breeds liability for acquirers as swindlers see aggregators as a soft under-belly of payments (see Figure 2).

Fraud perpetrators target new intermediaries as they perceive they are weaker at risk management. As nearly all online marketplaces sell more third-party goods and less first-party goods, they are increasingly exposed. Con artists see marketplaces and file lockers as captive audiences they can exploit.

 

In some cases, these merchants resell pirated content and counterfeit goods, then change their names and merchandise to avoid getting spotted. In other cases, marketplaces are liable for hosted merchants’ deceptive marketing practices.

 

Implication: payment facilitators and marketplaces need solutions at boarding to make more informed decisions. They also need frequent monitoring of online content and hidden transaction laundering. One payment facilitator avoided $1.8 million in potential card network fines with proper monitoring.

 

Next, in part 3: How alternative online and mobile payments players create a symphony of choice for buyers and sellers… and a riot of risk for underwriters and compliance teams.

 

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