Emerging Markets can lead in reducing Credit Card Fraud

It is only natural for us to get concerned when the media is full of reports of credit card fraud (Fraud ring busted, Indian credit card industry hit with INR30Cr fraud), especially when so much effort is made by the industry to convince us that electronic payments are safe.  I agree that card payments are basically secure, with fraud at less than 50 basis points (0.5%).

Having said that, there are a few facts that are disconcerting

• Some of the card data was stolen from POS infrastructure: Payments at POS terminals should be secure.  The best practice is for:
• End-to-end encryption of card data, i.e., card data is encrypted from the point it is swiped to the point it is processed (your bank)
• It is best for the merchant / acquirers to not store card data
• It is necessary for acquirers to continue to upgrade POS terminals provided to merchants to ensure that weak points in the chain get strengthened.  It is only natural for fraud to migrate to the weakest elements.
• Talking about fraud migrating to the weakest link in electronic payments, it is inevitable that electronic commerce / online stores will show up in most fraud cases.  This is because the de-facto method of payment at online stores is via 'Card-Not-Present' mode.  Card-Not-Present is when the merchant cannot verify whether the customer is in possession of the card being used for the transaction.
• When card data is fraudulently harvested, the easiest place to use stolen card data is at online stores
• While online stores take a lot of effort to detect such fraud (thru' two-factor authentication, intelligence in back-end systems...), there are always some countries whose laws are not as stringent as others.  Again, fraud migrates to countries with lax authentication laws.
• While it is easy to parade Chip-n-PIN / smart cards as the silver bullet to prevent such fraud, Card-Not-Present payment mode at online retailers will continue to be the backdoor that fraudsters will exploit.
• Magstripe is not the only bad boy, Card-Not-Present mode of payment deserves some of the blame as well.

Link to a related article by Doug King, Atlanta Fed

Ending on a positive note, one (among many) thing that the industry can do is to work towards supporting Card-Present (or some variant thereof) payment mode at online stores.  Technology leaders have been working on such solutions and can roll them out if the industry commits to  it.  Emerging markets who have traditionally leaped-frog technology due to lack of legacy can play a leadership role here.  India can set the tone by issuing contactless cards to support Card-Present payments online.

Another initiative would be have a deadline for retiring all POS terminals that do not support end-to-end encryption.  Payment Networks, such as Visa and MasterCard, can take a lead on this.

Would love to hear your thoughts on this.

New twist in payment card security

The security breach at Barnes & Noble stores is noteworthy, because of the interesting twist in this story.  We in the payments industry have always believed that online payments were the hairy ones, with payments made at stores safe and secure, especially when you enter your PIN.

The breach at Barnes & Noble retail outlets occurred due to tampered PIN Pads (in less than about 10% of their stores).  Guess what, their online stores are safe and secure.

Key takeaway points to retailers:

• Nothing is intrinsically safe or unsafe
• You have to work to make your systems safe, and keep them that way
• Fraudsters are always out to get you (sounding paranoid, huh!)

Please drop in a note of any other noteworthy points from the above news item.  Would love to hear from you.

Card Payments in Turkey: Trends in contactless and mobile payments

This is the last part of a two-part series about card payments in Turkey.  The first part of the series provided a market overview.  This post looks at trends in contactless and mobile payments.

When it comes to contactless space, Turkey is the second country in Turkey after the UK. Number of contactless credit cards have almost reach % 6 of the total number and it seems that the growth will continue. Garanti Bank leads the market here and there are unconfirmed plans that they will migrate all the card portfolio into contactless cards.

Card payments in Turkey: Market Overview

Turkey is a trend-setter in the card payments space.  Understanding what is happening in Turkey could help us understand our own markets.  

Mr Burak Ilgicioglu is the guest writer, and provides an overview of the market and trends there.  Burak has been working on card payment systems since 1994. He has worked for 4 different banks and 2 different payment processors and still working for a bank as the card payment systems analysis manager in Turkey.  He is married with 2 kids. His main areas of interest are smart cards, contactless systems, Visa & MasterCard systems, networks and regulations. He is the creator of the blog focused on contactless systems : http://contactless-world.com

Visa India

Have you heard of Visa India?  I came across a news article today referring to such a company.  When you visit the Visa site and select India, you go to Visa South Asia section.

I am not trying to make a big deal of this innocuous article.  Given the background about NPCI, quite a few folks whom I interact with suggest that a Visa India (similar to Visa Europe) is a reasonable market response. 

Interview with Prof Das re: Cashless Payment System in India

The response and discussions triggered by Cashless Payment System in India - A roadmap has been marvelous.  Discussions among payments professionals [in India] have invariably gravitated to debating either suggestions in the report or the broad press coverage the report received.  For sure, the report has helped bring the spotlight to the niche area of electronic payments and its role in an emerging market.

While Prof Das, the author of the report, has been understandably busy, he took some time off to talk with Mr Manju Murthy.  Please find below the excerpts of the conversation:

MM: Why did you feel there was need for this report?

Review of report: Cashless Payment System in India

This post reviews Cashless Payment System in India - A roadmap authored by Prof Ashish Das, IIT Mumbai and Ms Rakhi Agarwal.  This report is a well researched and comprehensive report which is a must read for payments professionals, those who focus on India and others as well.  The report is unbiased and credible as the authors objective has been to identify factors to deliver an effective and efficient retail payment tender for India.  As a professional addressing opportunities in India, I have been waiting for this report for a while now.  The 104-page report did not disappoint.  While I normally do not have much patience (or attention span) for long documents, this report was an easy and quick read.  I encourage you all to read this report.

The summary of the findings are:

Mobile POS for Micro-merchants

I have been intrigued by the trend to accept mag stripe cards while on the go.  Mobile POS terminals have been used by large organizations for a while now (e.g., rental car drop-off).  However, acquirers did not find it cost-effective to offer similar services to micro-merchants (baby-sitter, handyman...) [US Market size/TAM of 26M].  The total transaction volume handled by these micro-merchants did not justify addressing this unmet need.  Payment received via cards by micro-merchants monthly can vary widely, starting from as little as nothing to thousands of dollars.  While most micro-merchants would like to keep their fixed costs to a minimum, those that wanted to have the facility to accept cards had very few service providers selling them this service [at a premium].

Note: This post evaluates the opportunities in the US market only.

Who cares about US mobile payments

The latest mobile payment announcement (Mercury NewCo) is note worthy.  AT&T and Verizon among them have over 170M subscribers, and would deploy 60M handsets annually (assuming an average of 3-year plans).  Assuming half of the handsets on offer support mobile payments, and a third of those subscribers activate their mobile payment service, we can expect about 10M new mobile payment cardholders each year.

It may not come as a surprise that nearly half a dozen banks offer MasterCard PayPass cards, and 10 issuers offer Visa PayWave cards. These banks have already deployed over 60+M contactless cards over the past 5 years.  There is a 1 in 3 chance that US readers of this blog have a contactless card in their wallet.

You might wonder why I jumped from mobile payments to contactless payments.  Elsewhere in the world, these two payments are synonymous.  I would tap my phone to pay for products/services.  Consequently, I am assuming that this latest announcement is going to be along similar lines.

Benefits of closed-loop payment networks

I was surprised to note the continual downward trend of fraud figures reported by PayPal (see graph [includes some interpolation]), including their recent figures of 0.18%, which is about 1/3rd less than comparable figures with Visa/MC.  This is one of the obvious value-adds of closed-loop payment schemes.  PayPal is an example of a [dominantly] closed-loop scheme, in which the merchant and the consumer use PayPal for payment, thereby making it easier for the scheme provider to detect fraud.

Setting up a new scheme: Learning from CUP

Traversing down the roadmap of bringing a payments scheme to life is interesting.  Once a scheme is launched, most of us think that all the features of the scheme come to life in relatively short order.  As an entire industry is affected by a new scheme coming to life, getting a good feel for timeline is critical to success of many products/ventures that are dependent on the scheme of the land.

Features of a typical scheme include:

• Domestic
• ATM
• Retail (Debit, Credit)
• Online
• Other payment networks (Postal system, Rural, Cooperatives...)
• Connectivity / bilateral agreements with other schemes (primarily 'international'), primarily around card acceptance
• Connectivity / bilateral agreements with international banks (primarily 'international') primarily around card acceptance

Broadening electronic payments coverage in India

Electronic payments industry requires the government to motivate laying the rails (aka necessary infrastructure).  It is heartening to note that government in India is using RBI's bully pulpit to get there.  Public Sector banks in India have signed up to bank the unbanked over the next 5 years.  I am sure the skeptical readers have been hearing about such good intentions for many years without any perceptible change in ground realities.  I think that this time it is going to be [marginally] different

• Back to back governments of the same party is providing adequate time to focus on and deploy infrastructure
• Political parties in India have figured out how to benefit from government sops being distributed electronically.

 Having said that, it will take time (5+ years) and effort to see electronic disbursements and financial inclusion (FI) make a difference in the lives of the poor, and change behavior (reduce use of physical cash).

Reserve Bank of India (RBI is the Indian Banking/Payments regulator) Deputy Governor Dr KC Chakrabarthy, among other RBI officials and Bank management shared their Financial Inclusion plans at the 23rd SKOCH Summit on Financial Deepening in Mumbai:

• 
  
  

King of grand vision and bold strokes

Reliance (RIL) led by Mr Mukesh Ambani re-enters the telecom market in India by acquiring Infotel (source) for about $1B.  Infotel, in the recently concluded auctions, won the pan-India Wireless Broadband license.  Why would a blog about payments and commerce care about this development?

Overview of RIL: As you might be aware, RIL is a major player in India's growing retail space.  RIL has been aggressive in experimenting with different formats of stores, business models, locations...  RIL, under the leadership of the older Ambani, has used a wide canvas and made bold and audacious strokes.  When RIL started Reliance Infocomm (since renamed to Reliance Communication), they were amongst the first telco to have Java on all their handsets.  RIL has been generating a lot of cash (cash surplus of $25B over the next 4 years [Source]) from its petrochemical business and needs new projects to deploy this cash.

RIL and Commerce: RIL's vision in communication is to make broadband-based TV, Internet and Phone affordable and ubiquitous (as they did with mobile phones/service in 2003 [Source]).  They plan on having

It is all about inexpensive convenience

In India, banks are making a serious and sincere attempt at serving the unbanked / underbanked.  However, progress has been slow and restricted to the margins.  G2C not withstanding, domestic remittance is one of the litmus tests of whether formal channels (banks & post office) are relevant in the lives of rural Indians.  Elsewhere in the emerging/developing world, remittances have been the killer app to start the process of digitization of cash in rural settings.

A survey conducted by IFMR, indicated the following as the top reasons (not in any particular order) that drive choice of channel for [domestic] remittances:

• Lines / queues to send / receive money
• Time taken [by service provider] to deliver the money
• Price (fees/commission charged)
• Proximity of deposit and withdrawal points
• Business hours of deposit and withdrawal points (should be open during hours when they are free)
• Minimal paperwork as a significant percentage of migrant workers are marginally literate

Bridging the gap in Branchless Banking

This post is the final part in the series on branchless banking, and will provide an overview of the innovations (or gaps that need to be filled) necessary for branchless banking to be viable.  The introduction of this series set up the context.  The first part of this series provides statistics about the industry as is today, which is essentially in a fixed-cost and money-loosing phase.

The following structural changes are recommended to help the industry move from an early-adopter opportunity to a sustainable market which has the green shoots of sustainability and stability:

•  Use of Commercial Off The Shelf (COTS) hardware as a POS device.  This would preferably be a device which the agent already uses, for e.g., a mobile phone.  
• This will reduce the cost of entry for an agent
• Standardized devices will have higher uptime and lower maintenance costs
• Such devices will be interoperable with other service providers' infrastructure
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State of Branchless Banking in India

This post builds on the previous post which setup the context of this series, and will provide an overview of branchless banking as they exist today.  The next post in the series will discuss bridging gaps that exist and will provide recommendations for service providers.

Below are some of the key performance measures of branchless banking in India (based on many sources including CGAP articles from G Chen and K Krishnaswamy et al):

• Account Opening Fees paid by banks for No-Frill accounts, a major revenue stream, does not exist.  Presently, No-Frill accounts are a loss-making proposition.  Consequently, I don't see banks pushing for new no-frill accounts in their current avatar
• Custom hardware devices are provided, as POS terminals, by service providers (e.g., FINO, ALW, Eko) to their agents (e.g., merchants), in lieu of a deposit (typically INR 5000 / $115)
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Analysis of Branchless Banking in India

It is easy to agree that branchless banking is a preferred way to serve rural India.  However, I have been trying to get my business mind to arrive at the same conclusion by looking at the numbers.  I would like to go thru' such an exercise here at the risk of getting beaten up.

I am starting this exercise by leveraging the wonderful work done by CGAP, notably these two publications:
    ○ BC Banking Channels in India - G Chen
    ○ Building Viable Agent Networks in India

Visa getting into acquiring business

SBI is teaming up with Visa International and Elavon (Source) to jump start SBI's acquiring business.  It is a critical win for Visa.  In light of SBI being the 800# gorilla in the India, their choice of Visa is intriguing.  Is this the beginnings of Visa's aspirations in the acquiring space?  When Visa decided to acquire CyberSource, Visa was expected to be measured in its interaction with the merchant community so as to not offend its partners, the acquiring banks and processors.  With Visa's intentions of taking CyberSource international, and its move into acquiring business in emerging markets, we might seeing elements of Visa's strategy for the coming decade (at least in emerging markets).  With SBI's interests in mobile payments (primarily driven by financial inclusion and branchless banking initiatives), Visa's JV with SBI becomes even more significant.

What does this mean for NPCI's aspirations and the IndiaPay initiative?

Look forward to your comments on the implications of the SBI-Visa JV.

Visa's acquisition of CyberSource: Potential for growth but not quite a home run

Since going public, Visa's expansion plans had to be well calibrated to not upset a lucrative business while trying to take advantage of upcoming trends.  Visa's M&A considerations ere driven by the following factors:

Ecommerce segment is more lucrative: Prima facie it makes sense.  The interchange rates charged for  credit card payments is around 1.8%.  However, ecommerce merchants pay around 2.5%+$0.30.  This provides payment gateway providers, such as CyberSource revenues of around 70 bps.  This kind of revenue is huge, considering that the financial risk as a payment gateway service provider is minimal.  The percentage revenue to a payment gateway provider in only second to that of an issuer.

Mobile Payments are coming:  They will change the dynamics of merchant acquiring, not in as far as displacing incumbents, but as they are expected to take a significant share of future growth.  This holds true for both developed and emerging economies.

Brick-n-Mortar still rules: While ecommerce and mobile payments have folks gushing, transaction volumes from these sources account for less than 20%.  The bulk of the revenues come from brick-n-mortar stores which Visa wouldn't want to impact.

Visa's decision to acquire CyberSource met these criteria.  Having said that, it is not clear how much of the upside from ecommerce CyberSource can deliver to Visa.  It is interesting to note that CyberSource's revenue per dollar processed is only 22 bps (Revenues of $265M from TPV of $120.4B).  This is pretty small compared to expectations of over 50 bps.  However, CyberSource's TPV per merchant is also a whopping $400K/merchant/year ($120.4B from 300K merchants).  The high number is consistent with CyberSource's clientele of both high-volume retailers and SMB online merchants.  Compare this against PayPal's TPV of over $10,000 per merchant per year ($20.1B/quarter from 8M merchants).

Consequently, the opportunity then for Visa is to increase both revenues per transaction, and revenues per dollar processed.  Additionally, the mobile payments world will be dominated by lower value transactions and smaller/micro merchants which requires the payments service provider to have low acquisition, fixed and variable costs.  Both Visa and CyberSource are both used to medium and large retailers.  To effectively compete and take advantage of mobile payments, the new entity has to fill the above holes, either thru' internal capability or thru' yet another acquisition.

While the acquisition looks like a base hit, it will require a lot of chutzpah from Visa's management to convert it into a triple, which Visa really needs if it is going to be something more than a payment scheme (which its shareholders demand) and to take on PayPal in any meaningful manner.

Electronic Cash in India: A conversation with S Fareedi

I spoke with Mr Seemab Fareedi, Senior Manager, Smart cards division, Sodexo India to understand the opportunity for electronic cash instruments for micro/small payments in urban India.  India is a fast growing market holding promise for a lot of industries.  I wanted to find out from Seemab whether the broad based optimism holds for electronic cash as well.  Below are the excerpts of the conversation:

Manju: How much of a problem is cash handling for small merchants in quick serve restaurants (QSRs)?
Seemab: Merchants like to handle cash.  This is as much cultural as it reflects the high interest rates that merchants have to pay for short-term loans for informal sources.  Additionally, labor is cheap to both handle cash with customers as well as to process cash at the back end.

Manju: How practical / attractive is cash displacement (use electronic cash [payment cards] instead of physical cash) in QSRs?
Seemab: The cost of handling physical cash is not as high as it is in the west (primarily due to low labor costs).  Additionally, the special place that cash holds in the culture of small merchants far outweighs the benefits of electronic cash

Manju: How attractive is the business of acquiring transactions from QSRs?
Seemab: The MSC is pretty low in India (1.25%-1.5%).  When combined with low ticket values in QSRs of $1-$6, QSRs are not very attractive / viable to payment processors.

Editorial Note: While the interview was around QSRs, the points made are as applicable to other similar use cases, including paper/magazine stands, coffee shops...

Manju: Prepaid telecom service plans revolutionized the telecom industry in India with over 95% of all consumers using prepaid plans.  Does this success usher in similar innovation trend in the payment industry?
Seemab: Indian regulators have been very proactive in regulating the prepaid industry.  They are very specific in what a service provider can and cannot do based on the role they play in the payments value chain.  Additionally, they expect sizable balance sheets from service providers.  While this is good for consumers, it virtually eliminates startups from innovating in this space.  It is debatable whether consumers would have been the beneficiaries if startups were allowed to bring innovative products to the market (though some of them would have failed).  In addition to this, telecom operators in India are yet to gain that level of trust which a bank enjoys for handling money and subsequently payments. However there are few instances where telecom operators and banks have team-up and synergized to create very promising payment instruments like m-wallets or SMS-enabled payments.  We need to wait and see whether it is really successful.

Manju: How attractive are prepaid cards for consumers?
Seemab: While prepaid cards, like other payment cards, are attractive to consumers, the chore of loading funds into the prepaid wallet is inconvenient.  As internet penetration is still not universal, consumers have to use physical kiosks to load value which significantly reduces the utility of prepaid instruments. Indian population is fairly under-banked and it can be a hindrance & could impede the prepaid proposition here.  Sometime back India had around 403 million mobile users. About 46% of them, or 187 million, did not have bank accounts.

Manju: Mass Transit services are being deployed in a massive scale across large cities in India. Does this trend impact the perception of electronic cash?
Seemab: Mass transit has the capability to change behavior, both consumers and merchants.  Innovations coupled with transit wallets is the silver lining in the cloud.  Only time will tell how regulations will affect/impact this opportunity.

Manju: Seemab, thanks for your forthright comments and perspectives on the Indian market.  I am sure that the readers will benefit from your experience.

Note: The views expressed here by Mr Seemab Fareedi are purely personal and does not reflect company's stand or viewpoint.

Look forward to your comments, questions and observations about the above perspective and insights.