Post on 18-Jul-2020
transcript
www.TheStrawGroup.com / www.PaymentsPulse.com
All Things Payments & EMV
Section 2: The Opportunity and Data Metrics
Section 1: Payments Primer
Section 3: Trending
To Be Covered
Section 4: The Future of Payments
History and major payments milestones
Merchants having the ability to accept card brands is the foundation of the merchant acquiring industry
1920 Companies such as oil companies and hotel
chains issued their own credit cards
1946 First bank card
“Charg-It” is introduced
1949 Diners Club
card introduced
1951 Franklin National Bank
issues the first bank credit card
1958 American Express introduces its first
credit card
1959 Financial institutions introduce a revolving
balance option
1966 BankAmericard (now
Visa) and InterBank Card Association (now MasterCard) are
established
1986 Discover Card, originally
part of the Sears Corporation. Its first card was unveiled at the 1986
Super Bowl
1998 PayPal is founded
2006/2008 MasterCard and Visa go public; previously owned
by member FIs now regard themselves as payment companies
Section 1: Payments Primer
The Changing Payments Ecosystem
Section 1: Payments Primer
Tech. Solutions Payment Brands
POS Providers, VARs, ISVs
3rd Party
Processors
Banks
Gateways
Acquirers
ISOs
The typical transaction flow
Traditional Merchant Acquiring: Clearing & Settlement Overview
Payments Network remits
funds to the acquiring bank
If authorization occurs, the Issuing Bank withdraws and
remits funds through the Payments Network
Acquiring bank credits Merchant’s account, net of
fees paid to the Issuing Bank, Payments Network and Merchant Acquirer
Merchant submits transaction information to its Merchant
Acquirer
Acquirer transmits transaction, via 3rd Party
Processor, to the appropriate Payments
Network
Payments Network directs transaction to the respective Issuing Bank
for authorization
Authorization
Settlement
Merchant
3rd Party Processor
Payments Network Issuing Bank
1 2 3
4 5 6
$
Consumer
$
Merchant
ISO/Bank/Acquirer
Section 1: Payments Primer
Issuing Bank
Card Brand
Sponsor Bank
Processor
Acquirer / ISO
Channels
Total Trans $0.11
Total Trans $0.08
Total Trans $1.41
Card Swipe Fee Income – Typical $100 Credit Card Transaction
with a swipe fee rate of 2.36%
Total Trans $0.02
$97.64 Revenue to Merchant
The economics of a $100 card transaction and the estimated revenue to each player in the value chain
Indirect / Traditional
ISO Direct Sales
POS Developers /
VARs
Trade Associations /
Other
Total Trans $0.74
Channel Share
Section 1: Payments Primer
In recent years, payments companies have evolved to provide more products to merchant clients, with recent products and service offerings including business management software, marketing tools and analytics, as well as mPayments (mobile payments)
Small Merchants
Market
Large Merchants
Mid-Sized Merchants
Products / Services
Indirect / Traditional ISO
Direct Sales
Agent Banks
Telesales
POS Developers / ISVs and VARs
Trade Associations / Other
Sales Distribution
Check Processing & ACH
Pre-Paid Services & Loyalty Solutions
Credit / Debit Card Processing
Virtual/Physical POS Terminal
Sales
Grocery / Supermarkets
Restaurant (Table / QSR)
Hotels
Representative Verticals
Specialty / Mass Retail
Convenience / Fuel
Healthcare
Property Management
Education
Data Security / PCI
Retail Direct Selling
Business Management
Software
Marketing Tools & Analytics
Section 1: Payments Primer
Electronic payments companies are the driver of commerce in the U.S.
In 2015, there will be
$4.9 Trillion of Volume on Cards in the U.S.
$408 Billion Per Month
$13 Billion Per Day
$560 Million Per Hour
$9 Million Per Minute
$155 Thousand Per Second
In 2015, there will be
82 Billion Transactions on Cards in the U.S.
7 Billion Per Month
224 Million Per Day
9 Million Per Hour
156 Thousand Per Minute
2.6 Thousand Per Second
U.S. Consumer Spending:
$10.5 Trillion (2015)
For context
U.S. GDP:
$16 Trillion (2015)
Federal Government: collected $2.5 Trillion in taxes
(2012)
Section 2: The Opportunity & Data Metrics
The growth opportunity in the U.S. consumer payments processing market continues to be attractive
*Electronic payments in chart above include credit, debit, remote, prepaid transactions, EBT cards, and preauthorized **Cash and check in the chart above include checks (only direct payments), cash (cash advances/withdrawals on credit/debit cards and checks written to obtain cash), money orders, official checks (cashier’s checks, teller checks and certified checks) and travelers cheques ***Consumer Payments are defined as the purchasers component of personal consumption expenditures
U.S. Consumer Payments Breakdown: Electronic vs. Cash/Check
$0
$2,000
$4,000
$6,000
$8,000
$10,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Electronic Payments Cash and Check
2015 Cash & Check: Market Opportunity 2015: $3 Trillion
2005 Cash & Check: Market Opportunity: $3.4 Trillion
2005 Total of Electronic Payments: $3.4 Trillion
2015 Total of Electronic Payments : $7.2 Trillion
$ Billion
+8% CAGR
-1% CAGR
Section 2: The Opportunity & Data Metrics
Total Visa/MasterCard credit & debit payment volume is estimated to reach nearly $4 trillion by 2015
U.S. V/MC Payment Volume Trends & Projections
Source: Visa & MasterCard earnings releases 2012 data annualized YTD Sept. 2012 totals 2013, 2015 trended using 2012-2016 CAGR
$674 $743 $808 $824 $764 $809 $889 $959 1,042 $1,237
$1,405
$554 $643
$726 $817 $883 $1,054
$1,152 $1,096 $1,155
$1,217
$1,283
$472 $509
$548 $547 $477
$479
$508 $524
$567
$613
$663
$146
$216
$269 $309 $327
$333
$393 $443
$484
$529
$578
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Visa Credit Visa Debit MasterCard Credit MasterCard Debit
$1,846
$2,111
$2,351 $2,497 $2,451
$2,675
$2,942 $3,021
$3,248
$3,596
$3,929
(Volume in $ billions, debit is signature and PIN)
+8% CAGR
Section 2: The Opportunity & Data Metrics
The chart below displays the performance of a $100 investment in an index of selected payments companies which represent the “TSG Payments Index” - this index is calculated on a value weighted basis using market capitalization and is compared to the S&P 500 which is also calculated using the same methodology. A $100 investment in the TSGPX in Q1 2007 would now be valued at $346, as compared to $146 if invested in the S&P 500.
The chart above displays the performance of $100 investment in an index of the following listed companies which represent the “TSG Payments Index” - this index is calculated on a value weighted basis using market capitalization and is compared to the S&P 500 which is also calculated using the same methodology. This analysis does not include affects of re-invested dividends. While some of the companies listed in TSG’s Payments Index do not meet the requirements to be a S&P 500 listed company (S&P listed companies have a market cap of at least $3 billion), the S&P 500 served to be the best comparable index to TSG’s Payments Index since it is one of the most commonly used benchmarks for the overall U.S. stock market. In fact, many consider it to be the definition of the market. The companies included in TSG’s Payments Index met the criteria that at least 50% of their revenues were produced from electronic payments products or services. Ingenico and Gemalto have been removed due to inclusion of NetSpend and Cardtronics as well as their being traded on non-US exchanges. As of Q4 2011 Fundtech has been removed due to an acquisition and Tier Technologies’ name has been changed to Official Payments. Vantiv was added to the index as of Q1 2012. 3PEA International was added in Q1 2013. LML Payment Solutions and Transaction Network Services were removed as of Q1 2013 due to acquisition.
Section 2: The Opportunity & Data Metrics
U.S. Merchant Breakdown: Acquiring Opportunities – 2015 est.
Sources: Morgan Stanley estimates and TSG estimates
National
Merchants > $1 Billion
Annual Bankcard Volume
Large
Merchants $1 Million - $1 Billion
Annual Bankcard Volume
Mid-Sized
Merchants $100,000 - $1 Million
Annual Bankcard Volume
.005%
Merchants
2%
Merchants
12%
Merchants
50%
Sales Volume
30%
Sales Volume
12%
Sales Volume
25%
Revenue
30%
Revenue
5%
Revenue
Estimated Number of Bankcard Accepting U.S. Merchants: 8 - 10 Million
Total V/MC Bank Card Sales Volume: $3.9 Trillion
Total Acquirer Net Revenue: $11 Billion
Small
Merchants < $100,000
Annual Bankcard Volume
86%
Merchants
8%
Sales Volume
40%
Revenue
Small and medium size merchants make up the majority of the opportunity for most merchant acquiring companies
40% of the *net revenue opportunity *Net Revenue = Gross Revenue + Other Income – Cost of the Trans.
Section 2: The Opportunity & Data Metrics
If you’re not doing payments, you’re missing out on big money. If you are doing payments, do what it takes to get all your customers processing with you.
In the recent past, a deluge of inside changes have affected the merchant acquiring ecosystem
Consolidation
Mobile
Technology Companies Compete
eCommerce
M e r c h a n t A c q u i r i n g
Section 3: Trending
Trend: Consolidation – or lack thereof
1988 1997 2005 2013
Company Volume
($M’s)
Share
% Company
Volume
($M’s)
Share
% Company
Volume
($M’s)
Share
% Company
Volume
($M’s)
Share
%
Top 10
Acquirers
97,031 39% Top 10
Acquirers
407,624 66.7% Top 10
Acquirers
1,451,394 84.5% Top 10
Acquirers
$2,496,011 76.8%
Top 50
Acquirers
161,134 64.8% Top 50
Acquirers
594,662 97.3% Top 50
Acquirers
1,705,563 99.3% Top 50
Acquirers
$3,110,523 95.8%
All Bankcards 248,796 100% All Bankcards 611,039 100% All Bankcards 1,717,429 100% All Bankcards $3,248,568 100%
One of the continuing myths of the payment industry is that the industry is “Consolidating” to smaller and smaller group of “winners”
When compared to the make-up of the Top 10 Acquirers in 1988 compared to now – yes indeed the percentage of $ Volume controlled by the top 10 has gone from just 39% to more than 75% in 2013
Compare that though with 2005 – then almost 85% of the industry was in the hands of just 10 major acquirers.
Section 3: Trending
Trend: Mobile Payments. Payments made via a mobile device in the world – 2010 – 2015 estimates
Source: IE Market Research
$240
$379
$600 $634
$670
$-
$100
$200
$300
$400
$500
$600
$700
$800
2011 2012 2013 2014 2015
11,161 13,204 15,622 18,482
21,866
0
5,000
10,000
15,000
20,000
25,000
2011 2012 2013 2014 2015
2.9%
3.1%
2.2%
3.8% 3.4%
% Mobile Payments
Global Consumer Electronic Payments $ Volume via Mobile Device 2011-2015 est. (in billions)
Global Card Payments $ Volume 2011-2015 est. (in billions)
Section 3: Trending
Trend: Technology Companies Competing
Square and PayPal’s influence has been immense in that they helped created a new, card accepting micromerchant market – see chart below. With this new market, merchant acquiring is not a zero sum game.
The U.S. Merchant Market (Est.)
150 Largest Merchants
100,000 Large Merchants
250,000 Medium Merchants
6.5 Million Small Merchants
25 Million Micromerchants
% of Visa & MasterCard Sales
Volume
50%
30%
12%
6%
<2%
Traditional Merchant
Market
New Merchant
Market
Square’s Market Share
(~2 million merchants)
Section 3: Trending
Trend: Ecommerce
71%
18%
2%
1%
1% 1%
7%
Cards
Mobile wallets
Direct Debits
Mobile
Cash on delivery
Bank transfers
Other
eCommerce Share By Payment Type (U.S.)
8%
92%
eCommerce Sales
Other Bank CardPayment Methods
eCommerce Share of Bank Card Volume (U.S.)
Section 3: Trending
The ecommerce space is an important and growing opportunity in the U.S. market. Currently, 8% of Visa/MC volume is online. To compete, merchant acquirers have to have an ecommerce offering.
In the recent past, a deluge of outside influences have changed the merchant acquiring ecosystem
Data Security Breaches
EMV
Emerging Purchase Model
M e r c h a n t A c q u i r i n g
Section 3: Trending
Data Breaches Happen Frequently 1,054 breaches last year in the U.S. alone
Data Breaches Cost Millions $54.M is the average cost per company
Most Breaches Could Have Been Prevented 89% of breaches analyzed by the Online Trust Alliance could have been avoided with basic controls and best practices
Primary Breach Targets Impact The Largest Merchants
45% 24% 9%
Retail Food & Beverage Hospitality
2013 broke the record (by nearly double) for the most records exposed: 822 million globally
The recent Target breach ranked only fifth in breach history for total records exposed
The average breach cost per record was $188 in 2012
78% of initial intrusions are rated as low difficulty
Trend: Data Breaches
Section 3: Trending
EMV
Major card brands support EMV because it: • Reduces criminal attractiveness of card fraud. • Reduces chargebacks due to counterfeit or stolen cards. Fewer chargebacks
save merchants time and reduce the frustration typically involved with the chargeback process.
• Helps merchants avoid the potential liability for card-present card fraud. • Creates common cardholder experience. Moving to the EMV standard in the
U.S. will make it easier for U.S. travelers using cards abroad. Likewise, international travelers have peace of mind when conducting transactions in the U.S.
• EMV also helps usher in the new technology and capability for contactless transactions. EMV is the stepping stone to the future of payments due to its dynamic data authentication (i.e. contactless, mobile).
What Is EMV?
Source: EMVCo; Smart Card Alliance; American Banker; Federal Reserve
EMV, named for the coalition of Europay, MasterCard, and Visa (the EMV Coalition or EMVCo) that developed the specifications for the system in the 1990s, improves safety through better card security and improved standards. EMV has become the world-wide standard and both U.S. neighbors, Canada and Mexico, have EMV mandates impacting U.S. multi-national retailers.
Section 3: Trending
EMV Fraud Liability Shift Explained
October 2012 April 2013 October 2013 April 2015 October 2015 October 2016 October 2017
Visa
PCI audit relief
Acquirers & processors required to support merchant acceptance of EMV
transactions
3rd party ATM acquirer
processors & sub-processors required to
support EMV data
Card-present counterfeit
liability takes effect excluding automated fuel
dispensers (AFD)
ATM liability shift
Card-present counterfeit liability
takes effect for automated fuel
dispensers
MasterCard
Account data compromise (ADC) relief
(50%)
ADC relief (95% - 100%)
ATM liability shift
Lost or stolen
liability shift for
AFD
Lost or stolen
liability shift
Discover PCI audit relief
American Express
Each card network's EMV deadline varies slightly, but these are the broad requirements put forth for their implementation: • April 2013 - Merchant acquirers and card processors had to upgrade their systems to be able to
process chip card transactions. • October 2015 - Liability for magnetic stripe card fraud is shifted to the entity that does not support
EMV technology. The broad idea is that the merchant, issuing bank, or credit card processor that's not on board with EMV would bear the responsibility when fraud occurs.
• October 2017 - The liability shift goes into effect for organizations that sell fuel. These businesses have much more expensive payment terminals and have more time to upgrade.
Liability Approaching
Source: EMV Migration Forum; TSG Analysis and Commentary; Federal Reserve; Retail Info Systems (RIS); Card brands
Section 3: Trending
Who is ready (and who is not) for the transition to EMV in the U.S.?
Section 3: Trending
34% 39% 44% 47% 53%
0%
50%
100%
Oct. 2015 Dec. 2015 Jun. 2016 Dec. 2016 2017
There is an abundance of estimates from a variety of research firms concerning U.S. EMV terminal migration
U.S. EMV Terminal Penetration Forecasts
Source: TSG Analysis and Commentary; Aite; Javelin; EMV Migration Forum; BI Intelligence; Mercator
The Strawhecker Group: U.S. EMV Terminal Penetration (SMB centric survey)
14%
28%
59%
73%
90%
53%
71%
84%
17%
38%
58%
75%
14%
35%
57%
70%
87%
15%
32%
49%
68%
84%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2013 2014 2015 2016 2017
Aite Javelin EMV Migration Forum BI Intelligence Mercator
Who is ready (and who is not) for the transition to EMV in the U.S.?
Section 3: Trending
Three key impediments that are stalling EMV at small merchants:
• Limited awareness
• Absence of a clear ROI
• A story they've heard before
EMV: Not Coming To A Small Merchant Near You
There is a troubling reality for small-merchant EMV take-up. • 4% of merchants with fewer than 20 employees have implemented EMV-compatible terminals. • 72% have no plan in place to deploy the technology by the October 2015 liability shift.
4% 24%
35%
37%
Yes
No, but plan to do so prior to October 2015
No, but considering acceptance with no definite time frame
No, and no plans to do so
EMV Deployment at Merchants With Fewer Than 20 Employees
Source: Yankee Group
Where is the Opportunity?
The Value Added Benefits of EMV
Section 3: Trending
The Time is Right • Smart phone usage and technology. Given that phone manufacturers are gearing up to include NFC
capabilities, and the rapid replacement rates of smart phones by U.S. consumers (every 1.7 years on average), it is predicted that over 50% of smart phones will be NFC enabled by 2015.
• Growing momentum of contactless. Many major retailers have already implemented contactless payments. While the technology being deployed in the U.S. is not fully dynamic, the growth in usage by consumers indicates that the contactless payments will grow even more significantly in the more feature-rich, dynamic mobile world.
• Changing shopping behaviors. The number of consumers using online shopping aids, such as price comparison and product review sites, is growing rapidly. However, there continues to be a missing, seamless link with the payment at POS and online.
• The new ecosystem will increase consumer usability and spend. Consumers are likely to use their EMV-enabled devices more frequently and enthusiastically when they have a clear understanding of the benefits - particularly around fraud prevention. EMV and the bridge to mobile will allow cardholders to experience interactive, real-time experiences such as location-based services, online reviews and price comparisons. The impact of consumers’ perception can be both significant and positive. In Latin America, for example, card usage following EMV migration increased with the perception of stronger payment security.
EMV Lays The Foundation For A New Payment Ecosystem In The U.S.
Source: TSG Analysis and Commentary; NFC Times; RIS; Edgar, Dunn & Company
The Value Added Benefits of EMV
Section 3: Trending
Niche Segmentation Of A Customer Base And Long-term Cost Reduction • With the new ability of marketing programs to be rolled out faster than ever before, and the capability to mine
customer data, banks are expected to target ever-narrower customer segments to drive customer loyalty.
Flexibility To Create New Competitive Card Programs With A Fast Time To Market • EMV cards can provide new revenue sources when they are managed by an in-house chip management system.
New payment - and non-payment - services can be launched and delivered to the cards during personalization or post-issuance.
Expansion In The Types Of Payment And Non-payment Products That Can Be Supported On A Single Card Through Multi-Application Issuance And Lifecycle Management • Multi-application management, essentially the ability to offer multiple
products on one chip-based card, has long been touted as a progressive outcome of EMV adoption. FIs around the world have not taken advantage of this potential. It is expected that the upcoming adoption of EMV and the marketing prowess of U.S. FIs will create an environment where multi-application cards will be exploited to their full potential.
Source: TSG Analysis and Commentary; Bank Info Security; Accenture
EMV Lays The Foundation For A New Payment Ecosystem In The U.S.
EMV – The Bottom-Line
Section 3: Trending
An open, collaborative approach by all industry stakeholders will be the best way to develop a comprehensive, thoughtful and innovative standard for the “next generation” secure payment acceptance environment/infrastructure. What’s more, timelines must be realistic for all stakeholders including issuers, acquirers, hardware manufacturers and merchants.
Collaboration Is Needed
Source: TSG Analysis and Commentary; Bank Info Security; Accenture
Sharing The Costs • The costs of conversion are considerable, and will be borne by
merchants and FIs. As in prior EMV rollouts in other countries, if the card networks were to help share the cost of the technological transition, it could drive much faster adoption in the U.S. The U.K. and Australian markets also were given interchange concessions by the card networks, which helped share the costs of purchasing and deploying new hardware and software that will benefit many stakeholders.
Trend: The Emerging Purchase Model
Awareness
Consideration
Purchase
As consumers AND merchants embrace the emerging purchase model, the tipping point is closer to being reached
Section 3: Trending
Traditional Purchase Model
The Omni- Channel Shopper
The Future Of Payments
Card Brands
Card Readers & Apps
P2P / eCommerce
Technology Companies
The Future Of Payments
Technology companies that have the potential to be disruptors in the payments space:
• New entries into the market have the potential to be very disruptive, but lack volume, acceptance and market share has limited any appreciable impact to traditional payment models
• Often more marketing buzz than business impact
• Historically focused on technology focused consumers for P2P and P2B transactions
• Other Technologies to watch out for: Bluetooth LE and beacons
• Apple Loyalty • Potential to be
Disruptive • NFC • iPhone 6 and Apple
Watch • Secure • Standard Rails • Limited Use • < 2% Merchants
• $6B Self Valuation • Mass Aggregation • Simple Boarding • Not Profitable • Underwriting • Poor Security • No Customer Service • Evolving Model
• User Base • Local Register • Backed by
Amazon • Incentives • Billing &
Recurring Payments
• 152 M Customers
• Global • Brand • $27 B Mobile • Home Depot • Aged Platforms
• Developer Preferred Interface
• Recurring Billing • Global • Secure
• Cash Based Service • <$10 Free • Flat Fee • Small (60 Employees) • Unique Approach • No Card Brand
Interactions • US Only
www.TheStrawGroup.com / www.PaymentsPulse.com
Question & Answer
About TSG The Strawhecker Group (TSG) specializes in providing financial institutions, merchant acquirers, card associations, ISOs, processing companies, large merchants, and the investment community with advisory services to maximize their growth and profitability.
TSG is also a resource for consumer spending data, industry research, benchmark studies, and developing trends.
For more information please visit www.TheStrawGroup.com.
Chuck Fillinger, Senior Associate TSG / Cfillinger@TheStrawGroup.com
402-964-2617
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