Pub. 7 2016 Issue 3

www.wvbankers.org 26 West Virginia Banker As product manager for Payment Analytics, Matt Herren has expand- ed CSI’s ability to address fraud through early identification of mer- chantbreachesandfraudulenttesting techniques.Hisworkhelpsto increase bank profitability through fraud miti- gation and card portfolio analysis, allowing customers to realize industry-leading results and maximize program performance. It’s Time to Adapt to the Digital Payments Landscape By Matt Herren, CSI F rom Apple Pay to Walmart Pay, the financial industry has been inundated with alternative payment options. While some are more popular than others, digital payment offerings present both growth opportunities and new challenges for community banks. And ready or not, it’s time to take notice. According to an eMarketer forecast report on mobile proximity—or digital—pay- ments, while 2015 closed with about $9 billion in digital payment transactions, that number is expected to rise to $27.05 billion in 2016—and $210.45 billion by 2019. Although there are a few exceptions, the major mobile payments players can be broken into two distinct factions—one that will propel financial institutions forward, and one that stands to take a chunk out of your interchange income. Mobile Wallets from the Card Space The first group comprises the mobile wal- lets that preserve the existing interchange model by utilizing the credit card network rails (Visa, MasterCard, American Express and Discover). These include: • Apple Pay • Android Pay • Samsung Pay From a consumer standpoint, these mobile wallets conduct payments using Near Field Communication (NFC) at a growing list of supported terminals. The user sim- ply “taps to pay” at an enabled terminal to complete an instant, secure transaction. According to the Aite report, Mobile Proximity Payments: A Disruption in the Force, “NFC has the greatest potential to become the standard transmission method for mobile proximity payments. NFC’s nearly ubiquitous presence in smart- phones, the rapid increase of NFC-capable terminals driven by EMV reterminaliza- tion in the United States, and the launch of Apple Pay will accelerate implementa- tion and usage of NFC payments.” The Merchant-centric Crowd Conversely, the second set of digital payments players is largely composed of retailers. This relatively new and growing group uses the ACH rails to facilitate pay- ments. Why the push for this breakaway faction? Very simply, money. Going the ACH route essentially costs these mer- chants little to no money, whereas with the existing card rails, they pay a percent- age of each transaction to both the card network and the issuing bank—the inter- change fee. By eliminating the interchange model—they boost their profit margins. This merchant group includes: • CurrentC/Chase Pay • Walmart Pay • Target REDcard Most of these digital payment alternatives work by having the consumer download an app and scan a QR code on their phone to facilitate the payment. The barcode changes after a few transactions—their form of security. The drawback is, taking a picture of a QR code on a screen doesn’t seem particularly secure or technologically advanced. Without a Doubt—the Card Space Wallets Are Your Bank’s Ally Ultimately, it’s the digital wallets from the card space that will continue to drive com- munity banks forward and preserve their interchange income. By riding the existing card rails, they’re sustaining a process that is far from broken. The biggest difference these mobile wallets have brought forth is an added layer of fraud security through tokenization. In- deed, fraud prevention is a major impetus driving change in the payments space. The industry has made great strides with EMV chip cards, which surround stat- ic card numbers with dynamic data to encrypt the transaction. And that’s a big boon to fraud prevention. But tokenization takes security yet another step: not only does dynamic data surround the creden- tial, but also the actual core credential itself—the card number—changes. Essen- tially, merchants receive one-time cre- dentials that can only be used for a single transaction—making it virtually impossi- ble for cybercriminals to predict what the next dynamic credentials will be. Risks of Ignoring Mobile Wallets Banks choosing to not engage with alter- native payments like Apple Pay, et al. risk losing consumer mindshare. If your card can’t be added to a digital wallet, consum- ers are going to use someone else’s card. Think of it this way: more than 80 percent of Americans have a smartphone of some type. So will phones be a larger or smaller part of everyday life in five years? The answer is pretty clear. How to Get Started To ensure you’re serving as many custom- ers as possible, your best path is enrolling in Apple Pay, Android Pay and Samsung Pay. It makes sense, since the card net- works have waved their costs for process- ing and facilitating the payments. And when you’re ready to jump into the mobile wallet pool, you should first reach out to your debit card processor. Your processor should act as your partner in completing your agreements with Mas- terCard and Visa and your addendum with the digital wallet providers, as well as ensuring your bank’s card art and logo are populated in the wallets and, finally, informing you of your “go live” date. Digital Truly is the Future of Payments As for securing customer buy-in, it comes down to making them aware that digital payments are available, and encouraging their use. Right now, about one-third of mobile devices are capable of making proximity payments, but from now on, all new models will feature this capabil- ity. Since people naturally upgrade their phones every couple of years, digital payments will rise exponentially. Will your bank adapt? n