Nov/Dec 2018
The Merchant’s Guide to Transactions, Cards & e-Commerce
2019
Payments Forecast ❱ The future is faster payments
❱ Maximize loyalty/rewards programmes
❱ Small businesses’ payments modernization growing pains
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TableKey of Contents theme
November/December 2018 Volume 9 Number 6
2019 Payments Forecast
Editor-in-Chief Steve Lloyd steve@paymentsbusiness.ca Editor Brendan Read brendan@paymentsbusiness.ca Publisher Mark Henry mark@paymentsbusiness.ca Contributors David Andre; Kathryn Argiriou; Felipe Buckup; Cyrielle Chiron; Steve Doswell; Mike Gardner; Mia Huntington; Dan Kelly; Elina Mattila; Peter Read; Daniil Saiko; Brian Weiner
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Creative Direction Jennifer O’Neill jennifer@paymentsbusiness.ca
President Steve Lloyd steve@paymentsbusiness.ca For subscription, circulation and change of address information, contact subscriptions@paymentsbusiness.ca
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©2018 Lloydmedia Inc. All rights reserved. The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of the publisher. Printed in Canada. Reprint permission requests to use materials published in Payments Business should be directed to the publisher.
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Focus on evolving customer expectations and habits
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Adapting to a changing landscape
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Follow (and serve) the consumer
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AI in banking: navigating the road ahead The transformation of global transfers
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The evolution of infrastructure, technology and cryptocurrency
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How disruptors are wooing market share
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Battling CNP fraudsters Growing the prepaid market
Points & Rewards 20 How banks can maximize loyalty/rewards programmes Payments Modernization 22 Small businesses’ payments modernization growing pains
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The future is faster payments
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Photographer Gary Tannyan
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Industry Disruptors • Alternative e-payments solutions • Restaurants & Foodservice • ATMs & ABMs • Cash & cheques
novemeber/December 2018
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The future is faster
payments
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november/December 2018
2019 payments forecast
By Brian Weiner
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few weeks back I forgot my wallet at home, but it didn’t slow me down at all. If this had happened a few years ago it would have been a very different day. But today I can pay for my parking, morning coffee and purchases throughout the day using my smartphone: wherever contactless transactions are accepted. Here in Canada, that’s most places I shop.
Change and progress Visa recently marked our 60th anniversary, which gave us the chance to reflect on just how much has changed in the payments space. We started out offering paper cards with a $300 limit. Today, through VisaNet, our advanced global processing network, we handle more than 65,000 transaction messages each second: processing payments in more than 200 countries and territories around the world. I’m just shy of 15 years working in the Canadian payments space and the progress through that time has been remarkable. Advances in payment security like neural networks and fraud detecting analytic tools, the advent of chip cards and the wave of contactless payments that has stretched across our nation have redefined how we see and use payments.
It's clear that Canadians are comfortable tapping to pay, and we believe merchants value the speed of contactless transactions as well. Canadians have been tapping their way through retail checkouts for years and contactless penetration continues to grow, including at restaurants, grocery stores and coffee shops. As of June 2018, one in two card-present Visa transactions in Canada are made by tapping1. That adds up to 41 Visa-contactless transactions every second: which is a 30 per cent increase year over year2. It's clear that Canadians are comfortable tapping to pay, and we believe merchants value the speed of contactless transactions as well. Consumers should feel confident in the layers of security protecting contactless payments, including EMV chip technology, biometric authentication, advanced fraud analytics and zero liability.
Growth potential There is particularly strong growth potential for contactless payments in the transit space. Visa’s recent Cashless Cities study found that transit agencies spend an average of 14.5 cents of every physical dollar collected, compared to 4.2 cents of every digital dollar. TransLink in Metro Vancouver, British Columbia was the first transit operator to seize this opportunity in Canada by delivering the first November/December 2018
“tap to pay” transit fare option in the country (see "Modernizing Canada's transit payments" May/June 2018 Payments Business). Visa cardholders simply have to tap their cards or phones to pay their TransLink fares: turning faster payments into faster commutes. People have embraced having an easy and cashless way to pay with the same Visa card that they use throughout their whole day, and without the need to carry a separate card that is only used for transit. Just two months after launch TransLink saw more than 1 million taps across 160,000 unique riders3. Now, a number of cities such as Montreal, Laval and Edmonton are working to bring contactless payments to transit systems, mirroring the trend in leading cities around the world. Even with all of this momentum, contactless payments still have lot of room for growth. For example, only 35 per cent of Canadian smartphone owners have made a payment with their devices 4. Now that most of the major mobile platforms’ wallets have launched in Canada, we expect to see those numbers increase steadily. Similarly, wearable form factors are still somewhat of a novelty for Canadians, with only a few smartwatches and devices offering payment options. Again, it’s only a matter of time until Canadians have more wearable payment choices. The appetite for paymentenabled wearables was evident when we launched prepaid tapto-pay pins, gloves and rings earlier this year at the 2018 Winter Olympics in PyeongChang, South Korea.
More work ahead As we race towards a future of faster payments we must continue to push the boundaries and enable more transactions to become contactless. All of us in the payments ecosystem—the networks, issuers, acquirers and merchants—should be thinking about our roles in driving contactless adoption. And further, we need to make sure that we are building and supporting payment advances that pave the way for the innovations of tomorrow. The payments landscape has changed tremendously in the last several years and the way the Canadian market has embraced contactless payments is only one example of that. How people pay will always evolve. The need to carry physical wallets and plastic cards will continue to decrease and the need for speed, coupled with convenience and security, will continue to take precedence in all aspects of payments. Driving more opportunities for contactless payments must remain high on the priority list for our collective industry. It’s exciting to think of the role we can all play in making the future of payments faster. Brian Weiner is vice president and head of product, Visa Canada. 1 VisaNet, data, domestic, card-present transactions, June 2017 and June 2018. 2 VisaNet, data, domestic, card-present transactions, June 2018. Calculation based on number of seconds in a 30-day month. 3 TransLink, “One millions taps—Tap to Pay hits a milestone”, The Buzzer, July 27, 2018. 4 comScore custom survey, Visa Canada Mobile Wallet & Transactions Research 2017 (n=1043).
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2019 payments forecast
Focus on evolving customer expectations and habits By Mia Huntington
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e have witnessed a rapidly accelerating pace of change in the payments ecosystem in recent years, and 2019 promises more changes—and challenges—ahead. Consumers want to be able to pay for things when, where and how they want. They are increasingly shunning cash and are opting for card, digital and appbased payments. Continuing a decade-long trend, Canada is now the secondlargest user of credit cards per capita in the world, with 90 per cent of adults owning a credit card, behind only Hong Kong, according to the World Payments Report 2018, published by Capgemini and BNP Paribas. Also, non-cash transactions globally are expected to post a compound annual growth rate of 12.7 per cent through 2021, the report said, so there’s no slowdown in sight. That means it’s more important than ever for payment processing companies like Elavon Canada to help businesses keep up with everchanging consumer demands. Elavon’s business customers range from multi-national airlines to local small businesses, and our clients expect the same seamless payments experience regardless of their size or reach. In simplest terms the four major areas the payments industry should be focused on in 2019 are: 1. Staying a step ahead of where digital commerce is going. This means anticipating what customers want before they even know they want it. Allowing your customers to split dinner bills and Uber rides or order ahead? No problem. Five years ago, did you know you wanted to pay for your Starbucks Grande Latte before you got to the store? 2. Further exploring open payments and application programming interfaces (APIs). Large financial institutions and FinTechs both bring value when creating innovative solutions. Open APIs are critical for financial institutions to attract the right FinTech partners. They are the linchpins of the work to create a seamless payments experience for customers. 6
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3. Using advanced analytics and machine learning to help businesses learn more about their customers. Customer data layers on top of everything else in the payments evolution, from increasing security against fraud to deepening customer relationships and improving customer service. Payments processors are now embedding artificial intelligence (AI) into the merchant experience in ways that not only help sales but increase customer loyalty. 4. Offering smarter, more flexible point of sale (POS) solutions that go beyond payments. Merchants are focused on running their businesses, and payments are just one of many touchpoints they have with their customers. Whether it be surveying their customers right at the counter, managing their employee schedules or even anticipating inventory needs, POS devices are rapidly becoming integral parts of business owners’ days, both instore and from the convenience of their mobile devices. The common thread running through the payments evolution is the focus on customers, both from the merchants’ and the acquirers’ perspectives. We need to look at customers as our guiding North Star. I think about it this way: we not only need to know who our customers are, but we need to know what our customers are doing and why they’re doing it. Customer expectations and buying habits are evolving. There is an expectation that businesses will anticipate their needs and at Elavon we are focused on helping the businesses we serve to curate not just solutions, but experiences that meet consumers’ expectations. While today’s evolving customers are more likely to try new things, they are also quick to abandon and not repurchase. The priority for us is to create meaningful interactions—as opposed to just transactions— to meet those customers where they are and keep them engaged over time. Mia Huntington is senior vice president and general manager for Elavon Canada (www.elavon.ca). In her 13 years with Elavon, Huntington has held leadership roles in business development and product management, primarily focused on e-commerce and omnichannel business growth in North America. november/December 2018
2019 payments forecast
Adapting to a changing landscape By Cyrielle Chiron
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n fall 2018 I had the pleasure of speaking about global payments trends across Canada and the U.S., sharing insights from RFi Group’s very latest global studies. While every country is unique and has different trends impacting their payments ecosystem, being able to adapt to a changing landscape is clearly a common theme and North America: Canada and the U.S., is no exception.
Declining cash, growing P2P use At a global level, while cash remains king, credit and debit card usage has overtaken traditional payments across most markets. In Canada and the U.S. paper (mainly cheques) are still widely used. However, RFi Group data shows that consumers expect to rely less on cash going forward and increase their usage of cards. This is especially true among Millennials, where we see lower number in terms of cash usage; they are the least likely to use cash in a typical month and are the most likely to be able to envisage a cashless society. We are also seeing a shift in the way consumers send money between each other. Our research shows that globally, cash, online banking and third-party apps are each being used by roughly a third of customers. While this is also true for Canada and the U.S., the two countries show different behaviours. In Canada, the use of online banking for peer-to-peer (P2P) payments is high and has grown significantly in the last 12 months. This is directly correlated with the growth of Interac e-transfer usage, which has been in part driven by the addition of new features over the past year. In the U.S. we see a proliferation of third-party apps like Venmo, which are becoming popular with particularly Millennials.
Limited FinTech provider demand At events people ask me about the use of FinTech and digital-only providers. What are consumers doing and what are they thinking? I tell them that the use of FinTech and digital-only providers is more prevalent in the payments space than in any other aspect of banking. At a global level we are talking about 64 per cent of consumers being comfortable using digital-only providers for their payments needs. As expected, it is higher among Millennials, but it is still quite high across all other age groups. The usage of these providers is on the rise, but we see clear differences across all of the countries we are surveying. Asian countries are leading the pack and we also see a lot of activity in the U.S.. But Canada sees a little bit less activity. It is not that Canadians 8
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are not interested in these players. Rather, it is that at least at this stage, our data shows they are quite satisfied with the way Interac and banks have been addressing their payments needs.
Crossing mobile wallet barriers At a global level, the proportion of consumers who have made an inperson payments via mobile (contactless mobile payment) has grown from last year, rising from 20 per cent to 27 per cent between the first half of 2017 and the same period in 2018. Our data shows that in countries where contactless cards usage is already well established— like Canada—the use of mobile wallets is usually lower. However, we see a clear appetite for new payments methods, especially among Millennials, so there is a real opportunity for mobile wallets. So, what are the main barriers to their use?
Source: RFi Group
Regardless of whether we are surveying consumers or merchants, the story is the same. Our studies find that security, reliability and prevalence are the key barriers to both usage and acceptance in Canada and also the U.S.. Education and reassurance are key to overcoming negative perceptions around security and reliability, but as an industry we need to educate the market about prevalence. When we speak to consumers about the different barriers of usage, a key theme that emerges is the perception that their merchants don’t accept mobile wallets in general or their particular wallets. Even Millennials, who you would assume to be more knowledgeable about these new payments methods, think third-party wallets like Continued on page 19 november/December 2018
2019 payments forecast
Follow (and serve) the consumer By Steve Doswell
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he key to understanding the landscape of payments is to observe the customer attractions and motivations. From convenience to speed to security, market needs will always drive innovation and advancement. Following closely to the over-arching trends of consumerism, payment developments have continued to skew towards online and mobile usage on-site. Also, in the mix is peer-to-peer: bank to bank apps have allowed individual consumer users the ultimate convenience of reconciling a restaurant bill or the cost of concert tickets between multiple parties on the spot. Here are the road signs pointing to where payments are going:
Successful approaches to alternative payments Convenience is the most commonly cited factor when it comes to deciding on alternative payment methods. Automation of payments through digital wallets and other means has changed consumer behaviour drastically and have proven to increase usage by facilitating spontaneous decisions.
Automated payments to enhance experience Counter-style food and coffee vendors such as Shake Shack and Starbucks have integrated order-ahead, pay-online options on their apps, enabling their customers to place orders through them and have the purchases ready for pick-up upon the customers’ arrival. Either the romanticism or sheer time efficiency of skipping the lines during peak hours motivates many customers to embrace such apps and drives recurring usage (and purchases).
Mobile payments Smartphones have changed user behaviour toward payments, and subsequently the structure of point of sale (POS) systems and purchasing platforms. ApplePay has made POS and online purchases seamless in various apps, enabling access to the customer’s credit card at the tap of a finger. In general, one-tap transactions are facilitated by digital wallets and in-app purchases and are now offered by several financial institutions and major consumer brands.
The highs (and low) of digital wallets. A research paper published by Ovum has estimated that digital wallets and instant payments will have completely replaced cards by 20241. This means that all payments will eventually be digitized. November/December 2018
Retailers and service providers must therefore accept the inevitability of automated payments and be prepared to adopt and integrate the underlying technologies into their business models. Consumers will benefit from the convenient experience of onetouch payments while retailers and service providers can capitalize on spontaneous decisions and minimal friction between purchasers and products. Everybody is poised to win in the land of digital payments.
In-app purchases An extension of the digital wallet element is the concept of in-app purchases, which is one of the highest revenue-generating avenues for digital merchants. Once again, playing on customers’ sense of spontaneous needs, in-app purchases mitigate the current friction between buyers and transactions.
Direct debit Consumers tend to prefer subscription-based programmes either for security concerns or to leverage retailer price breaks as rewards for paying up front or agreeing to recurring payments. For this purpose, direct debit has also become a prevalent form of payment for recurring purchases or bill payments.
Security The ever-present elephant in the room is the issue of security. As payments become increasingly digitized, the threat of hackers and security breaches rises, leaving many consumers reluctant to adopt these new technologies. Retailers are obviously aware of this and many are partnering with established transaction facilitators such as Square and ApplePay in order to leverage their security umbrellas in their order fulfillment channels. That being said, consumer wallets have been vulnerable to security breaches. All sorts of companies have been on the unfortunate ends of data breaches, with millions of pieces of consumer data compromised. There is also the simple risk of losing one’s phone. Digitizing one’s entire wallet seems like a convenient idea until the phone is lost or stolen, leaving one to wonder if the wrong person now has access to their entire wallet. In reality, physical cards are just as if not more risky than digital wallets if they are lost or stolen. But many consumers are unable to Continued on page 19 PAYMENTSBUSINESS
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2019 payments forecast
AI in banking:
navigating the road ahead By Elina Mattila
anada’s financial services industry has long been a leader in applying artificial intelligence (AI) technology. The Royal Bank of Canada, for example, is investing tens of millions of dollars over the coming years to investigate how AI can be successfully transferred to the banking industry1. Despite the considerable advances already made, the fact remains that there are still considerable challenges facing the delivery of AIdriven financial products and services. This is why Mobey Forum brought representatives from the international banking community together in Toronto recently to discuss the operational, technical and ethical challenges that banks and other financial institutions should consider when building AI products and services.
however, that only 24 per cent of banks validate the data they are using2. Fortunately, there is a growing consensus that there is much more work to be done in this area. Beyond technical and operational issues, there are the privacy and data security considerations. With the General Data Protection Regulation (GDPR) legislation now enforced across Europe it has never been more important to implement best practices for data protection. Banks and other financial services providers must understand their obligations: both domestic and international. Adopting the “privacyby-design” approach championed by Ann Cavoukian (Ontario’s former Information and Privacy Commissioner) will ensure that data protection considerations are proactively built into AI systems and programmes, rather than having to be reverse-engineered at a later date.
Only as good as the data you use
From “chat” to conversation
When it comes to AI, better data means better services. Obtaining, organizing, validating and protecting the massive datasets required to underpin AI products and services is hugely complex, however. Whether you are a start-up or global financial institution, obtaining or gaining access to data sets can be challenging. For start-ups, the sheer volume of data required can be prohibitive. For banks, securing the relevant permissions can be arduous. Once the information is obtained, the next step is data labelling and categorizing: a very labour-intensive procedure. Ironically AI has not yet found a way to streamline these mundane operational processes and relieve the need for extensive human input. Perhaps most importantly, banks must also be able to validate the data they are using. With AI increasingly used for decisioning and commercial modelling, the impact of using incorrect or manipulated data could be considerable. A recent poll from Accenture suggests,
The data itself is just the starting point. If we think about the increasingly popular chatbots, customer questions don’t align neatly with pre-developed FAQs that have been used in these applications. Instead they are often much more specific, contextual and complicated. This creates the potential for incalculable variabilities. Banks cannot build products and services with an infinite amount of data points, pre-programmed scenarios and responses. Therefore, AI programmes must be able to “learn” from previous experiences and interactions. Early AI deployments however could not effectively carry these learned experiences from one set of circumstances to another, meaning the smallest circumstantial variance derailed the interactions. For this reason alone, high proportions of queries still need to be passed on to human support. One bank, for example, has revealed that 55 per cent of enquiries submitted can be answered by
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2019 payments forecast its chatbot, with the rest requiring human interaction. We are now starting to see more advanced machine learning solutions enter the market that aim to deliver truly “intelligent conversations”. Voice AI in particular is an area that is developing rapidly due to the ability of solutions to effectively transfer experiences to new contexts.
Shining light on black boxes As AI products and services become more advanced and sophisticated, it is harder to understand exactly how decisions are made. We understand the data that goes in and the decision that comes out. What goes on between, however, is a mystery. This is known as “black-box AI” and, for various reasons, banks should look to avoid it. If you are turned down when applying for a mortgage this can have life-changing consequences. You would expect to know why the decision was made in “human terms”. Indeed, consumers in Europe have a legal right under the GDPR to an explanation of decisions made by algorithms. If the bank itself does not understand why, this explanation to the consumer becomes impossible. The black-box AI issue is compounded when considering the potential for biases to be inadvertently built into data algorithms. For example, if a bank were to start declining mortgage applications from
a certain demographic because of inherent bias within the underlying data, they would unwittingly be engaged in discriminatory practices. As AI becomes increasingly integral to the decision-making processes, banks should be committed to transparency to not only ensure compliance, thereby avoiding diverting resources to costly litigation, but also maintain the all-important customer relationships and brand reputations.
Turning the corner Considering the scale of the challenges still facing the implementation of AI into financial services and products it is perhaps unsurprising that we are still in the early phase of deployments. Yet it is apparent that AI will be the fundamental technology transforming the delivery of financial services. Collaboration, shared experience and joint expertise are critical if banks are to successfully harness the huge potential of AI to usher in a new era of advanced, intelligent products and services. Elina Mattila is executive director at Mobey Forum. Join the discussion @MobeyForum and on LinkedIn. 1 Solarina Ho, “Canada's Royal Bank boosts focus on AI with new research lab”, Reuters, January 18, 2017. 2 “'Fake data' will make banks vulnerable—Accenture”, Finextra, April 20, 2018.
Payments Business (www.paymentsbusiness.ca), published by Lloydmedia, keeps track of these trends and provides thought leadership from industry experts. How payments are made and managed payments is undergoing an exciting evolution. Examples include: • Contactless cards and mobile wallets • Internet of Things • Real-time payment rails • Blockchain and cryptocurrencies • ATM, cash and cheque modernization
For news and contributed articles contact
Brendan Read, Editor brendan@paymentsbusiness.ca 905-201-6600, x227 For advertising and media partnerships contact
But security and fraud risks also are rapidly evolving. There are new techniques, tools, standards and regulations to facilitate fast, intuitive, transparent and secure transactions and processing.
Mark Henry, Publisher mark@paymentsbusiness.ca 905-201-6600 x223
Payments Business is a Lloydmedia, Inc publication. Lloydmedia also publishes DM Magazine, Contact Management magazine and Canadian Equipment Finance magazine.
November/December 2018
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2019 payments forecast
The transformation of global transfers By Felipe Buckup
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Vecteezy.com
n my global money movement career, I have seen the landscape transform immensely. The market of today is a dynamic ecosystem, with new players, new integrated models and new ways of doing business. Most of this transformation can be attributed to the changing demands of digital-driven customers and the introduction of more technology-focused solutions. As a result, financial services firms are thinking more like technology companies and vice versa. The need to move money seamlessly across currencies and borders has never been more relevant to more kinds of people and to more businesses than it is today. As I look towards the future, here are my predictions for the biggest trends in the cross-border money transfer payment landscape:
Account-to-account (A2A) transfers on the rise In the past few years usage of A2A transfers has risen sharply in the money movement space, a trend augmented by the industry’s digital transformation and the host of options available to consumers. However, in many cases, large amounts are restricted from being sent, meaning that consumers are still required to send wire transfers across the globe. To help eliminate this cumbersome step, service providers will be forced to find new and inventive ways to serve high-value transfers.
Digital-first solutions continue to explode While retail senders are migrating to digital options, it is more important than ever for established companies to scale up their digital offerings to ultimately meet consumer demand. At Western Union, we’ve seen immense digital penetration and transaction increases: a trend that has coincided with our massive digital transformation into one of the largest digital money transfer firms in the world. Globally, our digital transaction revenue grew by 22 per cent in Q2 2018.
existing instant messaging platforms. Other small industry players are teaming up with larger ones to gain access to new markets, customers and technologies. There likely will be more interesting combinations of integrated collaborations on the horizon across the industry.
Merging the virtual with a human touch While customers are trending towards a digital-first attitude, the international money transfer landscape still benefits from an omnichannel presence. This is much like the changing nature of the retail landscape, with companies such as Apple and Microsoft investing in physical storefronts to extend their platforms. The combination of online and retail enables people and businesses to send and receive money across a full spectrum of uses and needs. The ubiquity and reach of your platform will continue to be a crucial need in a changing landscape.
Collaborations will be key Dozens of start-ups have been launched in the last several years touting faster and cheaper ways to send money abroad. However, while these new businesses and new technologies get a lot of attention for potentially being financial services disruptors, many innovations are coming from interesting collaborations and integrations. For example, as money transfers between friends and family can be innately social experiences, we’ve aligned globally with Facebook, Viber and WeChat to offer money transfer functionality through 12
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To summarize, changes to the remittance industry are happening rapidly. As I look towards the future, I am passionate about the potential of this space. Money transfers power our economic prosperity and enable our global transformation to a borderless future. When money moves, good things happen. And there are many good things to come. Felipe Buckup is vice president and general manager, Western Union Canada.
november/December 2018
2019 payments forecast
The evolution of infrastructure, technology and cryptocurrency By Daniil Saiko
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he way money exchanges hands is a constantly evolving process. As a result, the payments landscape will continue to transform the way companies and retailers do business. But as traditional forms of payment are increasingly replaced by digital options, payment systems are becoming progressively more complex, involving a multitude of players. In 2019, there are three areas where changes have the potential to greatly impact the payments industry: 1. Going live. Batch data processing has been the longstanding means of processing high volumes of data. The process works by grouping a set of transactions that have been collected over a period of time. The information is then pooled, entered, processed and the results are produced. But in today’s digital world, businesses and consumers expect immediate, transparent and up-to-date insights into their cash positions. Consequently, the industry is rapidly moving towards live data processing. Live data processing operates continuously, reading the incoming data and updating the results immediately. Live processing will not only speed up the time it takes for transactions to occur, but it will also allow consumers to experience faster service and allow providers to reduce operational costs. The shift away from batch data processing and towards live systems will intensify in the coming year. November/December 2018
While attending a Ripple Conference in San Francisco in October 2018, I realized just how much progress has been made. Most people associate Ripple with blockchain and cryptocurrencies, but the company is making huge strides in live data processing. As more people begin to implement technology like Ripple’s xCurrent, consumers can expect to see transactions being processed at a faster and more efficient pace. 2. Embracing FinTech. Technology has created a paradigm shift in the business world and this is overwhelmingly apparent in the financial services industry. Traditional banks have realized they need to keep up with the cutting-edge, nimble and flexible financial technology (FinTech) companies and are beginning to explore how to adapt their payment systems for this new world. Canada’s “Big Five” banks are spending hundreds of millions of dollars to advance their transactional processes with a specific focus on retail customers. These institutions are taking stock of how they deliver payment transactions and are shifting from the batch system of processing towards instantaneous and live transactions. As traditional payments processors look to upgrade their systems, they are increasingly relying on FinTech firms. Large institutions were initially resistant to utilizing these new technologies, believing their internal infrastructures were enough. However, as the large banks carve out new lines of business, they are gradually partnering with FinTech companies to integrate technologies into the core infrastructure that traditional institutions can provide. PAYMENTSBUSINESS
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2019 payments forecast These partnerships marry the size and scale of a big bank with a leading-edge FinTech to collectively expand the speed and power of payment processing. This trend is expected to be a driving market force in the overall financial services industry. The lines between traditional financial institutions and FinTech firms will blur further as more digitalbased banks rise to prominence, especially in frontier markets like Central and South America. 3. The rise of crypto. The numerous booms and busts we’ve seen in the cryptocurrency market over the past few years has left many people wondering whether cryptocurrencies can ever be reliable tools for making payments. While many investors and speculators have lost tremendous amounts of money this year, this only affected certain segments of investors in the retail market. Many long-term investors who initially invested their money in the last several years have experienced positive gains and still consider these forms of digital payments a reliable source of value and a medium of exchange. The fact remains that cryptocurrencies are a growing source of alternative payments and will continue to have important implications in the payments industry. Behind the bad news, cryptocurrencies also experienced positive developments within the realm of data and testing. Conceptually new methods of
looking at trust in digital mediums are being developed, with innovative algorithms and social constructs. The key to large scale adoption of cryptocurrencies will be improvements to user experience and overall behaviour. Crypto itself is only a means for solving problems. The payments industry needs to figure out ways to adopt this technology in a way that retailers and customers can benefit. For example, the Lightning network uses blockchain to offer near-instant payments in any amount, while charging much lower fees. It has built another layer on top of existing crypto technology to create a useful service. Finding new ways to implement this existing technology is imperative to market adoption. Despite the number of previous technical issues that have been resolved, the next areas that present a challenge are the regulatory and legal spheres. In particular, the Canadian government has been cautiously optimistic in their approach to cryptocurrencies. There has been a great deal of research done in order to better understand how these currencies fit within the existing space. This work has been primarily spearheaded by the Bank of Canada. For example, Project Jasper, which is a collaborative research initiative between the public and private sectors to understand how distributed ledger technology (DLT) could transform the wholesale payments system, recently concluded its third phase. The hope is that the Bank of Canada will be able to provide guidance based on its multi-year experience in studying and implementing solutions. For the next federal election, it will most likely garner interest and remain a talking point, in terms of promoting innovation in Canada.
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The proliferation of alternative forms of payment will continue to evolve in 2019 as the payments industry moves from exploring digital currencies to implementing them. As the payments landscape evolves in the years to come, the way consumers process transactions and how financial institutions interact with alternative currencies will ultimately shape where the industry moves. The payments industry has been rapidly transformed by technology, and the challenge for businesses has been keeping up with those changes. Today, consumers expect transactions to be fast, easy and flexible. Organizations need to explore new FinTech solutions, either through their existing financial services providers or new partnerships. The payments industry will continue to evolve in 2019, and successful businesses will be the ones that embrace the change. Daniil Saiko is director, technical sales and product, Cambridge Global Payments (www.cambridgefx.com).
To send press announcements, please direct them to Brendan Read, Editor, at brendan@paymentsbusiness.ca november/December 2018
2019 payments forecast
How disruptors are wooing market share By Mike Gardner
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ayments used to be one of the industry’s least vulnerable to disruption, but it is now facing transformative reshuffling, with new digital entrants and changes in consumer behaviour. Those in the merchant acquiring business that are counting on organic growth from existing markets are feeling the pinch.
A market experiencing seismic rebalancing The global payments industry has seen rapid growth in recent years. In 2016 it accounted for 34 per cent of overall banking revenues: that’s up 27 per cent from just five years earlier. Overall, the industry is projected to grow an average of seven per cent in the next five years1.
Traditional service levels and timelines... won't compete with today’s customer centric service options. But only some of the rapid growth in segments of the payments market is organic. A large portion of it is coming from the micromerchant space as more countries switch from cash and cheques to card payments. The result is competitive rebalancing, as payment facilitators and ISVs (independent software vendors) are disrupting the structure of the payments market. They are carving sizable market shares that are both organic and inorganic (e.g. from acquisitions) in nature. Micro-merchants that were previously too expensive to service with traditional methods are now being catered to by companies like PayPal and Etsy that make it easy and inexpensive to sign up with them to process payments. According to a recent study small to mid-sized businesses (SMBs) with less than $5 million in annual card volume will collectively generate 12.7 per cent more in card volume in 2018 than in 2015. SMBs have experienced a 4.5 per cent average compounded annual growth rate2. Not only has the micro-merchant segment become highly desirable due to its market size and combined processing volumes, but the early stage disruptors have been wooing and winning mid-sized merchants: the “bread and butter” of traditional ISO (independent sales organization) portfolios. Square3 and Stripe4, as examples, November/December 2018
have been moving upstream with new terminal offerings and other solutions for larger sized retailers. As a result, acquirers and ISOs are now feeling threatened. Traditional organic growth is taking a back seat to the inorganic growth of the digital disruptors in a big way.
Evolve or go bust The threat to traditional companies is real. This is highlighted by the staggering growth of those investing in technology to deliver faster customer-centric service and a full suite of products while the traditional players are inching along organically. According to research by Agreement Express, 2017 year-over-year revenue growth for traditional acquirers averaged approximately 10 per cent, with some as low as only four per cent. Yet disruptors such as Shopify grew 73 per cent in 2017 over the previous year and it looks like they are on track to continue this impressive trajectory in 20185. In the new rebalanced payments economy, those companies that can keep pace with rapidly evolving merchant demands for digital and diverse payment solutions will be the ones that grow their businesses and earn larger pieces of the market share pie. The writing is on the wall. Traditional payments providers need to evolve or go bust.
The questionable future for ISOs Does this mean that the traditional ISO market is dead? Contrary to the view of some industry pundits, the answer is no, but with a caveat. Traditional service levels and timelines from merchant application to approval won't compete with today’s customercentric service options. With more technology-led payments companies like payment facilitators and ISVs offering same-day approval for merchants to start processing payments, merchants will no longer onboard with ISOs. That is, unless ISOs offer services and timelines at par or better. Today, consumers demand a frictionless payment experience and so do merchants, but transactions aren’t the only thing they want in real time. The ISOs that avoid extinction will be those that are able to onboard a greater volume of merchants in less time. The question for them becomes “how do we get there?”
The silver bullet: same-day approvals The most crucial phase of the merchant lifecycle with any payments company is the first interaction: the application process. The impact PAYMENTSBUSINESS
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2019 payments forecast of digital payments disruptors is that merchants have come to expect and demand a same-day or sooner application and approval process for payments products. Digital payment service providers (PSPs) can perform this process that would traditionally take three to five business days in as little as five minutes. Their secret? They make it a point to get to know their customers by leveraging unconventional data and instilling smart risk models to make the underwriting process and approvals lightning fast. ISOs can avoid extinction by digitizing the development of merchant profiles, applying artificial intelligence (AI) in their risk scoring and assessment and robotic process automation (RPA) to their risk decisioning. The more an ISO knows about its merchants upfront, the more accurate the risk assessment and less conservative it needs to be in the approval process. And of course, the more merchants approved, the greater the increase in new business growth and competitive advantage.
approval process and lowers the cost of onboarding merchants. The critical enabler, however, will be in extending this onboarding and underwriting capability within an integrated ecosystem of payments providers. Together, members of the ecosystem will benefit from straight-through processing and deliver a unified merchant experience similar to that of a disruptive payment facilitator. The power lies in the efficiency, but also in the data secured and protected in the cloud for use across the platform. In the Agreement Express platform, when an ISO is in the sales cycle with the merchant, fields in the application are auto-verified and prepopulated from existing data sources. This eliminates the back-andforth between the mid-office and the merchant, helping automate the application process. Merchant data is shared from the application through the mid-office, back-office and underwriting teams seamlessly with no manual re-entry for fast approval turnaround. The information gleaned from the enriched merchant data allows these companies to grow the velocity of their business, approving and onboarding more net new merchants. Agreement Express will be able to, through application programming interfaces (APIs) and seamless integrations across ecosystems, help ISOs and acquirers securely and automatically share the merchant data to one or more key channel partners for underwriting due diligence or oversight. They can’t do this without end-to-end digital merchant onboarding.
For ISOs to remain relevant, they need to evolve to this new world order towards the streamlined merchant experience. One-stop shopping If the expectations for immediate application and approval timelines aren’t exerting enough pressure to the payments industry, merchants also expect a broader spectrum of product offerings to serve diverse consumer needs. What’s more, they want the convenience of doing business with a single entity. Payment facilitators and other disruptors are offering merchants a vast range of products under a single white-labelled experience. These PSPs essentially act as the front-end interfaces to a wide variety of products from different channel partners, all accessed by merchants under single umbrellas. And they are doing it all digitally and practically in real time.
Merchant onboarding is key Payment facilitators have mastered the art of onboarding merchants by making the process fully digital, simple, convenient and often uneventful. Just like consumer purchasing behaviour has become an anytime, anywhere function of our society, merchants are holding their payments providers to the same standard. For ISOs to remain relevant, they need to evolve to this new world order towards the streamlined merchant experience. The key is in merchant onboarding, which includes more than just digital forms and e-signatures. In reality, end-to-end onboarding also includes the aforementioned AI-driven risk scoring and RPA for underwriting and analytics. In the 15-plus years that we have been servicing payments companies, Agreement Express has helped acquirers, ISOs and other PSPs master this process with cutting-edge methods and technology. We leverage traditional and non-traditional data that speeds the 16
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The next frontier Agreement Express knows that product distribution ecosystems such as this are the future for payments. We have a growth equity partnership with Frontier Capital that will accelerate our ability to enable and automate end-to-end onboarding, with innovation that transcends across payments ecosystems. Our goal is to help our customers leverage the power of the payments product distribution network that will allow them to be customer-centric and agile to maintain current merchant portfolios as well as onboard new business in a simple, connected and intelligent way. In an era of connectivity, customer behaviour will continue to evolve as technology expands the breadth of what we think is possible. Companies managing merchant applications on paper, re-entering data into multiple systems or manually underwriting merchants are at risk of not only being disrupted but seeking to exist. It is our role to ensure that we deliver the innovation that the payments industry requires to stay ahead of the curve. Mike Gardner is chief strategy officer, Agreement Express (www.agreementexpress.com). 1 “Global payments 2017: Amid rapid change, an upward trajectory”, McKinsey & Company, report, October 2017. 2 Jim Daly, “Small Merchants Are Generating Bigger Payment Volumes, Analysis Finds”, Digital Transactions, October 8, 2018. 3 Raymond Pucci, “Square Continues To Move Upstream”, PaymentsJournal, November 8, 2018. 4 Anthony Ha, “Stripe Moves into Brick-and-Mortar Payments with Terminal”, TechCrunch, September 17, 2018. 5 Jessica Galang, “Shopify’s 2017 Financial Results Report $843 Million CAD Total Revenue”, BetaKit, February 15, 2018.
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2019 payments forecast
Battling CNP fraudsters By David Andre
C
ard not present (CNP) fraud is on the rise. According to one study of CNP fraud in Canada, it increased 205 per cent between 2010 and 2015 and accounted for 76 per cent of all fraud in 20151. Unfortunately, it could become an even bigger challenge in 2019 as attack surfaces evolve. The success of chip and PIN technology have pushed the battle lines of digital con artistry into new territory. High-tech fraudsters in Canada and Europe got a jumpstart since chip and PIN were introduced in those markets before others, like the U.S., that were slower to adopt this technology. It’s been a slow build, but now other parts of the world have begun to experience a spike in this type of fraud as criminals get better at anticipating each move issuers and merchants make. If there’s a vulnerability anywhere they’ll find it.
Machine learning helps by assigning a numeric score to each transaction to help fight CNP fraud. It can be a number from 1 to 999 that indicates a scale of possible fraud, with 1 being almost certainly genuine and 999 being almost certainly fraudulent. For example, at TSYS, our fraud-fighting Foresight Score is a tool that incorporates machine learning capabilities to help level the playing field in the battle against fraud. In essence, this kind of machine learning looks at the cardholder and comes up with a model of “normal” behaviour. Some of the factors considered when calculating a Foresight Score, include frequency of cross-border transactions, individual merchants and merchant locations, whether an individual uses a chip card or swipes their credit card, taps their card or use other and evolving cashless payments methods. The TSYS Foresight Score can help increase fraud detection by 35 per cent in some cases.
The race to get data
More consumers want to shop online with apps, or even with their voices, meaning more attack surfaces. To paint a picture of the continued challenges confronting fraud prevention, imagine you’ve got a perimeter around a big castle, and as technology advances, the castle gets bigger every day. There was a time when it could be protected with simple fortifications. There was also only one drawbridge: the plastic credit card. Now though, with continuous financial technological advances, there are new ways to get in. Each new entry point makes the perimeter weaker and thus harder to defend. Attack surfaces are on the rise as consumers warm up to digital transactions, such as Venmo, Zelle and PayPal. More consumers want to shop online with apps, or even with their voices, meaning more attack surfaces amidst a castle that is becoming more complex. The threat is growing, and it will only continue. There is good news though. There are industry breakthroughs in machine learning that are proving to be highly effective in the effort to reduce CNP fraud.
A model of behaviour A method of studying data that automates analytical model building, machine learning is a branch of artificial intelligence (AI) in which systems can learn from input, identify patterns and then make decisions. In the case of digital fraud, machine learning can reduce operational costs, enhance precision and deliver significant advantages in the fight against fraud. November/December 2018
At the core of machine learning is data. The simplest way to describe this defence against the world’s digital fraudsters is that it is a race to get data. The more data collected from sources like online retailers, apps and client banks the better machine learning can become at identifying fraud. That’s one reason that large payment companies are poised to gain more success in the fight against fraud than their smaller rivals because they have access to so much data. Studying this type of information and collecting data about individuals’ spending patterns, however, begs the question of what is an acceptable level of fraud? Meaning: not flagging so many transactions that customers who are making legitimate purchases get pre-emptively declined. Some banks tend to put the customer experience first, making sure that, above all else, card users don’t get unnecessarily blocked (false positives) for innocently using their cards somewhere new. But an occasional false positive can be the trade-off for heightened security that protects against fraudulent activities. Customers, when educated and aware about security, will accept the odd inadvertent blocking as the price to pay in these times: no different than the security they undergo when entering a public building or boarding a plane. The battle against CNP fraudsters is far from over because the ever-increasing attack surfaces expose new weaknesses every day. However, thanks to continuous breakthroughs in machine learning, we’re learning new strategies that will help us know when and where to make trade-offs and enable us to fight this kind of fraud even more effectively while attracting and retaining customers. David Andre is senior vice president of risk and fraud in the Global Product & Innovation Group at TSYS (www.tsys.com), a top global payments provider. 1 The U.S. Payments Forum, “Card-Not-Present Fraud around the World”, report, March 2017.
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2019 payments forecast
Growing the prepaid market By Peter Read
W
e all know prepaid solutions as innovative tools that encourage financial inclusion, help combat consumer debt, replace costly cheques and tackle hassles in business payment systems. But what may have begun as a niche set of products that fills a gap in the current payments system has quickly emerged into a core capability in payment and financial technologies. Today, prepaid solutions support many high growth initiatives around the world. Moreover, they have the ability to build the next generation of disruptive financial and payment technology services. A few of the recent financial innovation leaders utilizing prepaid accounts at their cores include Koho, Stack and Revolut. However, prepaid technology needs to be empowered further in Canada to grow in various areas so that it can catch up with global developments. With innovative technologies making strides to transform the way consumers, businesses and institutions transfer and settle payments, finding the right balance in terms of oversight and consumer protection and privacy remains key going forward. Here are the two scales that the industry and regulators are weighing in on for prepaid solutions. 1. Balancing innovation enablement with oversight. The regulatory environment of Canada’s FinTech industry is multifaceted and tends to overlap between federal and provincial governments, which has led some FinTechs to view this framework as a barrier to entry and development. But ongoing stakeholder initiatives, including reviewing the national retail payments and financial sector frameworks by the Department of Finance and Payments Canada are intended to accommodate and avoid overregulating the PayTech and FinTech evolutions1. One main area of focus that will continue throughout 2019 is seamless and frictionless real-time payments for consumer purchases and peer-to-peer money movement, as well as business transaction innovations. Real-time payments for consumers and businesses are set to expand with PayTechs and FinTechs expecting to be granted direct integrations to the new Payments Canada real-time payment rails (RTR). With the clearing and settlement system also anticipated to open up to financial institutions beyond the major banking institutions the stage will be set to facilitate new financial technology development. Traditional open-loop prepaid products run on the existing payment credit card network systems. They, along with their regulated financial institution members, have brought about a 18
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foundation of security and robustness. New technologies utilize traditional prepaid accounts to build on to eliminate reliance on cheques and manual processes and improve cost management and convenience to offer consumers and businesses a step into the evolving world of electronic payments. Coupled with the pending launch of the RTR, prepaid products will benefit from enhanced movement of funds to and from prepaid accounts beyond the traditional merchant transactions. 2. Balancing innovation with regulation. Given that the efficiency and attraction of many PayTech and FinTech solutions are based on non-face-to-face identity verification (IDV), the know-your-customer (KYC) requirements that protect against money laundering and criminal activity remain fundamental. This is especially true as the “bad guys” are exceedingly sophisticated and constantly working to steal or synthesize IDs for use in an increasingly non-face-to-face marketplace. As bank account replacements, reloadable prepaid cards are required by law to utilize KYC, which is on the verge of becoming far more frictionless in the near future. Enhanced ID verification and user authentication are two advancing areas of technology that will help prepaid leap ahead by winning people’s trust and driving product demand through frictionless interactions. As the regulators work to cautiously accept new IDV technologies, it is clear to many that digital and artificial intelligence (AI) technologies are not only better than face-to-face KYC, but they are essential to adopt if Canada is to remain competitive on the world stage. The countless stakeholder and global consultations by the legislators confirm their ongoing efforts to carefully research and craft legislation that enables the leading technology and innovation that Canada has always been known for. We expect to see more strategic collaboration by public and private sector members of the Digital ID and Authentication Council of Canada (DIACC), a centralized body that provides a framework for secure and privacy-enhancing digital verification and authentication. In addition, understanding regulation and the requirement for prior express consent for the use of personal information for purposes beyond IDV, will be key for FinTechs in tackling privacy issues. This includes educating consumers as to how anonymized aggregated data can be used without compromising personal data security and disclosure in clear and simple language. As PayTech continues to evolve, so will prepaid solutions. The $3.8 billion2 prepaid industry in Canada, while substantial and one on the november/December 2018
2019 payments forecast rise, has a lot of room for growth especially when compared to the $320 billion industry3 in the U.S.. The difference in population doesn’t account for the discrepancy alone. While educating consumers and businesses about the benefits of prepaid continues to be one aspect of it, balancing innovation with oversight, consumer protection and privacy will ensure that prepaid is ready to take advantage of growth potential.
Follow (and serve) the consumer Continued from page 9
recognize this, most likely the result of comfort with the established way of doing things combined with fear of the new.
Creative solutions Peter Read is chair of the Canadian Prepaid Providers Organization (www.cppo.ca). 1 Ana Badour, Shane C. D'Souza, Laure Fouin, Heidi Gordon, Shauvik Shah and Eriq Yu, “Fintech Regulatory Developments: 2017 Year in Review”, McCarthy Tetrault, article, December 29, 2017. 2 Canadian Prepaid Providers Organization, “Study: Canadian Open-Loop Prepaid Market Grows 27 Percent Over Three Years”, press release, May 22, 2018. 3 C. Sue Brown, “15th Annual U.S. Open-Loop Prepaid Cards Market Forecasts, 2017-2021”, report, Mercator Advisory Group, September 19, 2018.
Adapting to a changing landscape Continued from page 8
ApplePay or GooglePay are more widely accepted than bank wallets (41 per cent for third-party wallets versus 28 per cent for bank wallets). In truth both bank and third-party wallets are equally accepted by merchants as it is the same technology, except for Chinese wallets such as WeChat Pay. Perception of low merchant acceptance is also one of the main barriers to frequent usage. On the other hand, when we ask merchants about the key reasons why they don’t accept mobile payments, we see a clear lack of understanding both in terms of mobile wallets in general as well as the features offered through their point of sale (POS) terminals. Most believe they must update their terminals and/ or pay extra fees to accept these transactions. In Canada, many merchants are not aware that their current terminals, which already accept contactless cards, can also accept mobile payments. Making sure the communication goes from the account managers to the front-line staff is crucial to accelerating the acceptance of mobile wallets. However, perhaps more important than improving the understanding of these wallets is demonstrating their prevalence to merchants. Namely showing them that this is how consumers want to be paying: and that they risk losing customers if they don’t. One of the most common reasons that merchants don’t accept mobile payments, like via mobile wallets, is a perceived lack of demand from their customers. However, one in five Canadians have indicated they have either abandoned a purchase or avoided a merchant altogether because they weren’t able to pay the way they wanted to pay! There is a huge missing opportunity to promote acceptance of mobile payments among Canadian merchants, in this changing landscape, for the benefit of both businesses and consumers.
It is clear that digital payments are an undeniable wave of the future. In less than a decade, experts are predicting that all other forms of payment will become obsolete. Since hackers and digital destruction facilitators are constantly seeking new ways to steal funds and dismantle platforms, companies must be creative in determining how to best create their transactional platforms while keeping customer data safe and secure. Considering ways to protect customer data that will stay ahead of the hackers is the key in gaining trust and building loyalty. After all, there is no point in becoming on online merchant if no one trusts your platform. Soundpays has been designed with leading edge security standards in place to thwart data breach attempts. Relying on soundwaves unique to each customer adds a protective layer to their purchasing data. Additionally, customer information never remains static; the data is housed on remote servers that refreshes their IP addresses every 30 seconds. This gives hackers a next to impossible opportunity to take advantage of data vulnerability. The future of payments resides in both new methods and in security considerations and mitigating the vulnerability of customer data. Thinking outside the box and considering creative transactional solutions like Soundpays will position your firm to be a trusted merchant in your industry. Put the security of your customers’ data as the ultimate priority and your customer base will thank you for it. Steve Doswell is CEO, Soundpays (www.soundpays.com). 1 Matthew Heaslip and Kieran Hines, “Instant Payments and the Post-PSD2 Landscape”, Ovum, study, June 14, 2017.
For breaking news and in-depth features, visit our website at www.paymentsbusiness.ca
.ca
Cyrielle Chiron is managing director, North and Latin America, RFi Group (www.rfigroup.com).
November/December 2018
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Points & REwards
How banks can maximize loyalty/rewards programmes By Kathryn Argiriou
I
n Canada and globally financial institutions have always operated in an environment of rapid change and uncertainty. New and evolving banking models are being driven by changing consumer needs, increased regulation, new types of competitors and innovations in technology. More specifically, players within this space are facing a need to adapt to changing customer behaviours and preferences as an effort to stay relevant and to communicate effectively with customers. Considering these developments, customer acquisition schemes are decreasing, and customer loyalty and retention are increasingly becoming important. Some banks are responding by taking a broader view of loyalty and mimicking some of the successes from other industries, such as retail and travel. They are attempting to move away from product-focused approaches to more holistic, customer-centric ones, relying on the entire customer relationship across various products and services.
Customer acquisition schemes are decreasing, and customer loyalty and retention are increasingly becoming important. In this ever-changing environment, finding ways to stimulate and encourage participation in loyalty programmes is progressively gaining attention. Unsurprisingly, loyalty programme members who redeem rewards are highly valuable customers. Experience and research have demonstrated that these customers spend considerably more on their credit cards compared to those who do not take advantage of the programmes’ benefits. These customers are also more loyal and tend to keep their credit cards for longer periods and are less likely to churn. Lastly, credit card holders who actively make use of their cards’ rewards programmes tend to make greater user of all the other products they have with their banks.
Are banks fully reaping loyalty benefits? Credit card loyalty programmes offer many more benefits to financial institutions. First and foremost, they allow consumers to pool 20
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rewards gained across other relationships, products, services and interactions. Thanks to various coalitions and partnerships, credit card programmes act as important accelerators that consumers are taking advantage of to facilitate and expedite redemption opportunities. These programmes also help gain customer mind-share as they help influence interactions and behaviours across the entire relationships with their banks. Given these programmes’ structures and mechanisms, they can easily entice customers to open additional accounts and use certain products and services more intensively to earn additional rewards and points to get them closer to redemption and benefits. Here’s a critical caveat. Although these programmes offer incredible advantages, very few players within the space are truly leveraging them to the fullest extent possible. Until only recently, many banks still ran their operations in product silos. That made it difficult for them to understand the true value of customers’ total relationships, which inhibited their abilities to incent customers accordingly based on the commitments, loyalty and extent of the relationships. The following are a few levers that banks can leverage to help maximize the effectiveness of their credit card loyalty programmes and continue driving loyalty and engagement:
Move from points to alternative rewards As Millennials reach a point in their lives where they are making important financial decisions, banks need to do everything they can to attract this important segment of the population and foster their loyalty. To do so banks need to understand them. The Millennials could care less about traditional forms of rewards (points). Instead they want to interact and transact with institutions that stand for common values and which reward customers not solely based on transactions and the number of products held at one institution, but for engagement-based behaviours such as social media interactions and client and family referrals. Customers (including in the same generation, like Millennials), are not created equal. As such, they perceive reward programmes differently. What appeals to one consumer may have no value to another. Alternative rewards should include discounts on bank products and services, interest rate bonuses, service level guarantees and third-party reward programmes. A broad array of rewards is necessary to ensure that all customers perceive value; a differentiated range of reward options ensures that customers are rewarded based on the value of their total relationships. november/December 2018
Points & Rewards Seamless redemptions Enabling easier redemptions tends to improve customer experience and encourages greater loyalty programme participation. Banks can help reduce friction for loyalty members by making it easier to meet redemption thresholds and benefit from rewards. Consumers are increasingly turning to digital channels to continue interacting with their banks. Services such as cashing a cheque, investing in a specific stock, transferring funds to a family member or applying for a loan can now be easily completed from the comfort of one’s home. In the same line, to continue engaging with customers, banks have no choice but to ensure that customers can access and benefit from reward offerings through the use of offline, online and mobile channels.
to move away from the short-term strategies of product-centric loyalty schemes in favour of a longer-term approach that fosters true customer loyalty and engagement across a relationship that spans multiple products and services. Kathryn Argiriou is director, consulting services, Relation 1 (www.relation1.com).
Banks can help reduce friction for loyalty members by making it easier to meet redemption thresholds and benefit from rewards. Effective communication There is certainly room for banks to improve their communications in order to better educate customers on their rewards programmes and how to participate in them as well. These types of communications should be incorporated into each customer’s life cycle and should incorporate elements of personalization that allow the customer to feel recognized, special and unique. Reminding customers of their last redemption activities or providing tips and ways to get closer to their next redemptions are only a few examples of elements that can be leveraged in continuous dialogues with customers. They can also be used to leverage their loyalty programmes to develop relevant and contextual messaging. In both cases they keep the banks top of mind to customers: that the institutions are present and available to help and guide them along their customer journeys.
Data-driven marketing Banks can leverage data more effectively to create stronger and more meaningful relationships with their customers. Those that adopt these types of practices have demonstrated strong results by significantly increasing card spend and retention among credit card holders. With the plethora of information that is available through the transaction logs of consumers’ credit cards predicting customers’ needs in real time and serving them accordingly, should allow banks to benefit from more enhanced and relevant marketing and stand out from the competition. When implemented and leveraged properly, credit card loyalty programmes bring significant benefits to financial institutions. These programmes provide banks opportunities to reward, recognize and re-engage with their customers. They are also an opportunity November/December 2018
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Payments modernization
Small businesses’ payments modernization growing pains By Dan Kelly
T
he way Canadians make and accept payments is changing quickly. From Apple Pay to Square, PayPal or Interac e-Transfer, the choices are growing.
Moving away from cheques Yet business to business (B2B) transactions for smaller firms are still dominated by paper invoices and cheques in the mail. In fact, cheques still remain the preferred payment option, especially for larger amounts. Why cheques? For starters, accepting a cheque as payment can be less costly for a small business compared to accepting a credit card payment: which may have merchant fees in excess of two per cent of the transaction value. Cheques are also popular because they provide a simple record keeping system. If the Canada Revenue Agency (CRA) audits a business’s expenses, the owner can quickly turn to its record of cheques. However, a compelling case can easily be made against using cheques. A cheque can take days or weeks to process. Also, the cliché “the cheque is in the mail” can be disastrous to a small business during a Canada Post strike, like the fall 2018 strike. They can experience cash flow problems if the cheques are not delivered: which is what happened. Small businesses want more payment options. In fact, more than 80 per cent of Canadian small businesses are ready for more payment choices for point-ofsale (POS) customers, as well as more options for their back-office payments to suppliers and vendors, according to a recent Payments Canada study. E-transfers, e-wallets and digital currencies are some of the new payment options small businesses are seeking, as most are willing to move 22
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away from cheques: provided they have affordable options1. Our members have eagerly taken up new digital payment options through our exclusive partnership with Chase Merchant Services, which processes not only credit and debit cards with POS terminals, but also online transactions and payments through tablets and smartphones. They recognize that offering their customers versatility and a range of secure options is good for business. Businesses that deal primarily with B2B transactions also stand to benefit from moving to digital payments solutions. In fact, one of the biggest innovations in payment message standards for small firms is the adoption of ISO 20022, which provides more information about each payment transaction. Small businesses will be able to spend less time manually reconciling expenses and have more options to describe each payment with the new standard. This change alone has the potential to get small business to reduce their reliance on cheques as a record-keeping system.
Modernization hurdles But these FinTech innovations will not come to fruition until Canada’s payments infrastructure has been modernized. The work has begun; banks and other financial institutions are starting to re-build their information infrastructure to transition to an all-electronic system. The transition has not been without growing pains for small businesses, which sometimes feel their needs are being ignored by financial institutions. For example, the CFIB is increasingly hearing from business owners who are being defrauded out of thousands of dollars by employees who cash cheques twice, once by depositing them electronically through new “Remote
Deposit Capture” tools, then by depositing them in person at tellers or ATMs. But when business owners raise the issue with their financial institutions they’ve been told it’s their problem to deal with. And here lies the rub. When banks and other financial institutions start providing these new payment technologies, they will likely charge fees. In principle, this is fair since the cost of the changeover from paper cheques to an all-electronic system will not be insignificant. However, cost is the top obstacle preventing small business owners from shifting to electronic payment systems. The benefit has to be worth their investment. Will small business owners stop using paper cheques and go electronic willingly, knowing that there will be new fees to transmit, store and retrieve their payment information?
How to move forward Given the track record of the payments industry on credit card processing, it is little wonder why small firms are hesitant. Years of steady hikes in processing fees, together with confusing statements and hidden charges have eroded the trust of many small firms with the payments industry. The best way to restore trust is to ensure the industry provide innovations that are low-cost, secure and user-friendly. The end goal should be to boost competition and innovation in the payments industry that gives Canada’s small businesses and their customers lower costs and more choice: not the other way around. Dan Kelly is president of the Canadian Federation of Independent Business (www.cfib-fcei.ca) and lead spokesman and advocate for the views of CFIB’s 110,000 small and medium-sized member businesses across Canada. 1 Payments Canada, “Payments Pulse: Small Business Survey Edition”, report, March 15, 2018.
november/December 2018
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