Designing a Payment Facilitator Strategy Acquirer s Perspective.

Transcription

1 Designing a Payment Facilitator Strategy Acquirer s Perspective

2 MAC is an organization of Bankcard professionals involved in the risk management side of Card Processing. We have members from Banks, ISOs, Card Associations and others related to the risk management side of the industry. MAC s mission is to strengthen the payment ecosystem through ongoing education, communication and cooperation among acquirers, card brands and enforcement agencies. To learn more about MAC or to become a member of MAC please visit the website below. 2

3 Agenda Introduction and Session Objectives The Small Merchant Acquiring and PF Landscape Strategic Rationale for Sponsoring PFs PFs in Action: Select Case Studies Pricing Phases of Risk Mitigation 3

4 Agenda Introduction and Session Objectives The Small Merchant Acquiring and PF Landscape Strategic Rationale for Sponsoring PFs PFs in Action: Select Case Studies Pricing Phases of Risk Mitigation 4

5 Payment Facilitator Agreement and Funding 5

6 Payment Facilitator Value Chain Product and Sales Payments Products Payment Facilitators Sales Online Channels Bank Sponsors Processors Tech Players Other Channels Merchants Networks Integration layer and oversight ISVs POS Resellers (VARs) 6

7 Case Study: Evaluating the U.S. Market U.S. ISVs are rapidly adopting the PF model. Yet market penetration is still quite low Number of North American Payment Facilitators ( ) e2016 e2017 e2018 e2019 e2020 e North American PF Registration as a Percentage of the ISV Population ISVs 98% PFs 2% Transaction volume is growing even more quickly. We reach USS$4expect annual PF revenue to 4.4B by PF Transaction Volume (In $US billions, excluding PayPal, Square, Stripe) $513 PF Revenue (In $US billions, excluding PayPal, Square, Stripe) $4.4 $293 $2.5 $22 $44 $88 $163 $0.2 $0.4 $0.7 $1.4 e2016 e2017 e2018 e2019 e2020 e2021 e2016 e2017 e2018 e2019 e2020 e2021 7

8 Agenda Introduction and Session Objectives The Small Merchant Acquiring and PF Landscape Strategic Rationale for Sponsoring PFs PFs in Action: Select Case Studies Pricing Phases of Risk Mitigation 8

9 Strategic Rationale for Sponsoring PFs Distribution of Sales Leverage Technology to expand the market Distribution of Risk There are often multiple or overlapping reasons, but this alone should not complicate the decision. 9

10 How the Strategic Rationale Translates to Specific Strategies, Markets and Products Distribution of Sales Leverage Technology Increase Market Share Serve Smaller Markets Reach Verticals Existing Markets New Markets SME merchants Micromerchants Individuals New Verticals Existing, Specialized Verticals mpos Marketplaces Typically there are a multitude of overlapping reasons for instituting the PF model 10

11 Agenda Introduction and Session Objectives The Small Merchant Acquiring and PF Landscape Strategic Rationale for Sponsoring PFs PFs in Action: Select Case Studies Pricing Phases of Risk Mitigation 11

12 Case Study Details The Company Founded in 2001, adopted current strategy & brand in HQ in Waltham, Massachusetts. The Story A CNP gateway focused on frictionless checkout and increased conversion rates. Merchant aggregation is a critical part of increasing low cross-border conversion rates. Merchants can mix and match traditional and aggregated merchant accounts. BlueSnap focuses on the middle market (up to US$50M per year) with an out-of-the box solution. The Result Over 2,000 customers including Prezi, AutoDesk, & Kiddoz. Processing more than US$3.5B across 8 global sponsor banks Near zero risk losses Recently completed US$50M funding round to scale the business 12

13 Case Study Details The Company The Story The Result Founded in 1997 HQ in Levi, Utah Began targeting micro merchants in the early 2000s Developed a profitable model, and continues to maintain it after nearly 15 years. Successful enterprise sale to TSYS in 2012, now powering much of TSYS integrated payments platform and aggregation-in-a-box solutions. Affiliate model reduces cost per customer acquired, and up-front hardware costs, and mitigates risks. Over 1.3 million merchants boarded since inception, approximately 300k active Works with approximately half of top 50 network marketing organizations Processing more than US$3.5B annually Nominal risk losses One of TSYS fastest growing businesses 13

14 Case Study Details The Company The Story The Result Founded in Became a Payment Facilitator in HQ in Moorestown, New Jersey. Provides event management solutions for running races: reports, pricing, marketing tools, website management, race-day tools, mobile tools, enrollment tools, and payment processing. All monetized through transaction processing, charged at 6%. Differentiation through technology designed by runners, for runners. Currently the #2 player out of over 100 competitors. Boarding new races per month. Estimated 10% market share. No significant fraud losses. 8X growth (US$12m transaction volume to US$100m). 14

15 Agenda Introduction and Session Objectives The Small Merchant Acquiring and PF Landscape Strategic Rationale for Sponsoring PFs PFs in Action: Select Case Studies Pricing Phases of Risk Mitigation 15

16 Typical Small Merchant Pricing Vertically specialized Vertical payment solutions Value-added services Transaction fees General purpose Payments Only Payment processing Value-added services Value Added Services 16

17 Percentage of Revenue Margin Effects 9% Value-added services are the future of payments profitability. (example is based on US Interchange) 8% 7% 6% Vertically customized VAS (5%-8% with no incremental interchange/assessments) 5% 4% Incremental margin opportunity 3% 2% Net margin: 0.04% - 1.8% Acquiring, interchange & assessments 1.8%-2.2%) 1% 0% Low Payment processing volume High 17

18 Agenda Introduction and Session Objectives The Small Merchant Acquiring and PF Landscape Strategic Rationale for Sponsoring PFs PFs in Action: Select Case Studies Pricing Phases of Risk Mitigation 18

19 Risk Mitigation is not a Single Action Risk Mitigation Lifecycle: PF Submerchant Underwriting and Setup When more diligence is necessary Transaction Monitoring Progressive Underwriting at Tiers Application, prechecks, KYC, DB checks ecommerce and higher risk When an exception is triggered When a threshold is hit Automated Review Manual Review/Investigation 19

20 Know Your Customer Who is the owner? What is the business? Where are all entities located? What does their website say? 20

21 Required by Mastercard and Visa Run by the Acquirer MATCH Report Required by Mastercard and Visa prior to processing Not a black list Cannot have as a submerchant (Visa) Use for investigation Partial MATCH hits Multiple inquiry hits can be an indicator of fraud or other problems 21

22 Site Survey Requirements Mastercard - required for merchant Mastercard - not required for sub-merchant Visa - required when feasible for both Site Survey Substitutions Facebook Google, Yahoo, Bing LinkedIn TripAdvisor Angie s List 22

23 Risk Mitigation is Seldom a Single Action it Involves Multiple, Ongoing Phases Risk Mitigation Lifecycle: PF Submerchant Underwriting and Setup When more diligence is necessary Transaction Monitoring Progressive Underwriting at Tiers Application, prechecks, KYC, DB checks ecommerce and higher risk When an exception is triggered When a threshold is hit Automated Review Manual Review/Investigation 23

24 Website Review What to Review on All Websites Review all required elements Product sold Return policy Delivery policy Terms and conditions READ Secure payment page Currency type Customer service contact information Review all links 24

25 Risk Mitigation is Seldom a Single Action it Involves Multiple, Ongoing Phases Risk Mitigation Lifecycle: PF Submerchant Underwriting and Setup 2 When more diligence is necessary 3 Transaction Monitoring 4 Progressive Underwriting at Tiers Underwriting and Setup When more diligence is necessary Transaction Monitoring Progressive Underwriting at Tiers Application, prechecks, KYC, DB checks ecommerce and Higher Risk When an exception is triggered When a threshold is hit Automated Review Manual Review/Investigation 25

26 Traditional Transaction Monitoring Representative Traditional Parameters: Approved Volumes or Rolling Averages Internal negative data base Large transactions Large batches Large or unmatched credits Descending declines no longer a technical chargeback Multiple authorizations on the same card Same transaction amounts Low transaction amounts Unsettled authorizations Excessive keyed transactions Outside of approved parameters Forced sales Prepaid card Same BIN Same card across portfolio 26

27 Balancing protecting consumers from harm and submerchants from invalid claims Life Cycle of a Disputed Transaction Cardholder or Issuer disputes a transaction Issuer initiates a retrieval request for a copy of the receipt PF/sub-merchant provides legible copy of receipt or corrects the error Cardholder/ Issuer reconfirms claim Issuer initiates chargeback Submerchant decides to accept the chargeback or dispute it by representing with further evidence Prearbitration/arbitra tion the two sides cannot resolve dispute so final decision left with the card scheme 27

28 Life Cycle for Clearing of Transactions and Settlement of Funds 1. Cardholder transacts at a submerchant location 5. PF deposits funds to submerchant s bank account and notifies them of deposit 2. Clearing of transaction information 4. Acquiring Bank (or Processor) deposits funds into PF s settlement account 3a. Issuer gets transaction details and posts to cardholder account 3b. Card Scheme facilitates debit of issuer and credit of Acquiring Bank 28

29 Policy Requirements Card Scheme Regulatory Agency Financial Institution PF Submerchant 29

30 How the Bank Underwrites the Payment Facilitator Underwrite the Payment Facilitator Evaluate the PF s Operations Understand financial condition Financial statement & tax returns Insurance coverage, if applicable Review marketing plan Know how they underwrite agents Know the current portfolio Processing statistics and demographics Review all operational policies Know the owners Know all third parties used Review reputation of PF and owners Understand PCI compliance Perform onsite review 30

31 Bank Annual and Ongoing Review of PF Underwrite PF Review operations, financials and reputation Annual Reviews Review operations, financials and reputation Review Underwriting Educate to ensure they understand updates and changes Review Risk Monitoring 31

32 Bank Must Review PF Annually Mirror the original due diligence process Required at minimum annually Review financial and reputational information Review operational policies Understand any changes from preceding review Perform onsite review High Risk PFs should be reviewed more frequently Quarterly statistical and/or financial monitoring should occur following anomalous annual review results 32

33 Contact Us Todd Ablowitz Deana Rich +1 (303) linkedin.com/in/toddablowitz +1 (818) (818) linkedin.com/in/deanarich 33

34 Appendix 34

35 Payment Facilitator Model Then Now 35

36 SAVE THE DATE MAC 2018 Annual Conference March 13-15, 2018 SLS Hotel - Las Vegas, NV Register online at Don t miss the premier payments industry risk conference. 36