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Visa Wants to Buy Plaid. U.S. Sues

In January 2020, Visa announced it was acquiring Plaid for $5.3 billion. Perhaps because of the size of the transaction, or perhaps because Visa was acquiring a well-known and innovative technology company, the announcement was accompanied by much fanfare.

Before long, however, the U.S. Department of Justice began scrutinizing the transaction, resulting in the filing of an antitrust lawsuit to stop it.

This article will describe Plaid and explain why the Department of Justice is attempting to block the deal.

What Is Plaid?

Plaid provides the technical integrations for a huge variety of apps to communicate with financial institutions. It is an enabler of open banking via APIs. Consumers can make and receive payments, view account balances and transaction history, and more. Using Plaid, developers can quickly and securely connect their apps with financial institutions, which used to take months, sometimes years.

If you’ve paid a bill from your bank account via an app or website, Plaid’s technology was likely involved. Venmo, Stripe, TransferWise, Robinhood, and Coinbase are a few of the reported 11,000 financial institutions (with 200 million consumer accounts) that connect to Plaid.

Plaid was founded in 2013. It has secured roughly $300 million in venture capital. Interestingly, both Visa and Mastercard were early but silent investors. And the $5.3 billion price that it offered for the company — precisely double Plaid’s valuation at the time — indicates Visa’s strong motivation.

Plaid has access to a vast amount of consumer data. According to the Department of Justice, “Plaid has become the leading financial data aggregation company in the United States.” It’s fair to call Plaid the Google of financial data.

Why Acquire?

Shortly after the January announcement, Visa CEO Al Kelly said the deal would “position Visa for the next decade. It will help expand the company’s own total addressable market and relationships with fintech companies, as well as boost Plaid’s growth.”

In other words, the intent was to increase Visa’s presence in the financial technology sector and to increase profits.

DOJ’s Case

The Department of Justice believes the result would restrict competition. What follows is a summary of the DOJ’s case. No court date has been set, incidentally.

Visa is already a monopoly. The DOJ claims that Visa has become a monopoly in online debit-payment processing. Plaid, according to the DOJ, has developed technology that would challenge this debit monopoly.

Plaid was planning to use its technology together with its 11,000 banking connections to build a “bank-linked payment network that would compete with Visa’s payment processing and debit business.”

According to the Justice Department:

  • “Plaid’s money movement platform would allow consumers to pay merchants directly from their bank accounts using bank credentials rather than a debit card.”
  • “Plaid’s established connections and technology uniquely positions it to enter the payments market and disrupt Visa’s monopoly.”

Visa is restricting competition. Visa is attempting to acquire Plaid to stifle a burgeoning competitor that threatens the billions of dollars in fees that Visa charges merchants and consumers to process debit payments.

Visa is protecting debit-card revenue. Visa considers the acquisition as an “insurance policy” to protect its debit card business. Indeed, according to internal communications, Visa’s CEO said that if it did not acquire Plaid, “Visa may be forced to accept lower margins or not have a competitive offering.”

Visa’s Response

Visa’s short statement in response to the lawsuit stated, in part, “Plaid is not a payments company. Visa’s business faces intense competition from a variety of players — but Plaid is not one of them.”

The Long-term Effect of Buy Now, Pay Later

Point-of-sale financing services such as Klarna and Affirm make it easy for online shoppers to buy now and pay later. These financial tech companies have the ability to reduce checkout friction and please customers, but they may affect ecommerce in other, perhaps unexpected, ways.

For many online sellers, point-of-sale financing services can be a boon. Integration is typically easy. Merchants get paid immediately. Rates and fees are not extraordinary, and, as with most payment solutions, there are few or no upfront costs.

What’s more, adding Klarna, Affirm, or similar to a checkout page is likely to improve conversions. And both Klarna and Affirm will expose a store’s products and brand to millions of potential customers.

Thus adding a point-of-sale financing solution to ecommerce sites is seemingly a no-brainer. Yet there are a few long-term implications.

Financing as Marketing

At the time of writing, Klarna received about 85 million social media impressions a month. The company had about 7.5 million monthly active users. Klarna’s “Smooth shopping” app was the ninth most popular retail app in the iPhone App Store behind Amazon, Walmart, and Target.

Klarna’s app ranked higher than Wish, Etsy, Macy’s, Sam’s Club, Kohl’s, Best Buy, and Walgreens, to mention a few.

Screenshot of the Karna shopping app home page

Klarna is among the most popular retail shopping apps. It may attract shoppers not because of what they can buy through the app, but how they can pay.

So what does that imply?

Imagine you’re a shopper. Christmas is around the corner. You’re nervous about spending cash or even running up credit card debt during the pandemic. The prospect of dividing your holiday gift purchases over four installments has much appeal.

Well, you can. You simply download the Klarna app, shop away, and voila, you can “pay in four at any store,” making four interest-free payments over six weeks.

While this is very helpful for many shoppers, the marketing department at some retailers might be worried. The time and money that it has invested in attracting and converting customers just went out the window.

Many Klarna and Affirm app users are likely shopping at a store not because of marketing but because of extended payment options. Thus offering one or more point-of-sale financing services might be a marketing necessity.

Trouble Differentiating

When financing services and their associated mobile apps become a form of marketing and customer acquisition, differentiating retailers becomes challenging.

Think about the Amazon marketplace. Selling national brands such as Tide, Kleenex, or Nike is not the norm for smaller businesses — competing head-to-head against huge companies.

Many successful Amazon sellers are direct-to-consumer brands. They produce a product that is different in some way.

This same idea could apply to the Klarna and Affirm apps. These point-of-sale financing services might be creating marketplaces with their own form of search optimization and product promotion and their own ways of differentiating stores and products.

Customer Relationships

Is a shopper who pays for an order with Klarna or Affirm a customer of the merchant or those financing services?

When she visits an ecommerce store and pays with a Visa card, a shopper is, arguably, a customer of both Visa and the merchant. She is acquiring a service from Visa and a product from the store.

This could also be true of a point-of-sale financing service. When he pays with Affirm, a shopper is a customer of both Affirm and the merchant. Like the Visa example, he is acquiring a service from Affirm and a product from the store.

Visa and other payment card providers have generally played nice with customer relationships. For example, Visa has an app that helps consumers find deals and discounts while shopping, but Visa has refrained from sending marketing emails to customers every time they purchase, encouraging them to shop via a Visa-specific marketplace.

Klarna and Affirm are not quite doing this either, but they have been promoting their apps.

Payment Complexity

As the popularity of buy-now, pay-later ecommerce increases, integration with ecommerce shopping carts, mobile wallets, and even physical point-of-sale systems will be vital if payment complexity is kept to a minimum.

Imagine, for example, if it became normal for merchants to offer point-of-sale financing from Klarna, Affirm, PayPal, Afterpay, Sezzle, Quadpay, and similar. The shopper could face a checkout with more logos than a European soccer team.

Get Ready for Digital-first Credit Cards

In September 2020, Mastercard announced the expansion of its Digital First Card Program. Introduced in 2019, the program is a series of systems and procedures that enable credit card info to be downloaded directly to a mobile wallet.

The expansion aims to increase awareness and improve access to existing digital card-issuing technology.

Mastercard recently announced an expansion of its Digital First Card Program, which the company introduced in 2019.

Mastercard recently announced an expansion of its Digital First Card Program, which the company introduced in 2019.

It’s useful to compare the innovation driving the Digital First Card Program to the traditional method of issuing plastic credit cards. After receiving and approving a customer’s credit card application — a process that can take a few days to a few weeks — the card-issuing bank creates a credit card account for the applicant. At the same time, the bank sends the account holder’s credentials to its contracted card manufacturer.

At a factory that resembles Fort Knox, the card manufacturer imprints the card’s credentials on and inside a blank plastic credit card. This process is called personalization. It’s how credit card manufacturers insert credentials in the card’s chip and magnetic stripe and emboss the cardholder’s name and expiration date on the plastic.

When it’s fully personalized, the card is placed in an envelope with, typically, a contract, a brochure, and advertisements. The envelope is then sealed, stamped, and sent to the customer — sometimes by mail, sometimes by courier. Those steps — manufacturing and mailing — can take as little as one day and as long as a few weeks.

Modern Credit Cards

The Digital First Card Program modernizes the process of issuing credit cards, as follows.

  • No more plastic. Cards are virtual, existing in mobile wallets only. Personalization is entirely electronic. Card numbers, expiration dates, verification digits, and credentials are stored on a smartphone, not plastic. Customers can request a plastic card, but the primary use is virtual on mobile wallets such as Apple Pay and Google Pay.
  • Issuing is instant. The entire process of issuing a digital credit card, from application to approval to personalization to activation, should take no more than a few seconds rather than a few days.
  • Account maintenance is simple and user-friendly. According to the program’s guidelines, holders of digital-first cards can securely and easily check the account balance, view transaction history, receive important alerts, and access the card’s rewards or benefits. Most electronic banking apps and mobile wallets already include these features.
  • Access to card details is quick and secure. Despite the rapid adoption of mobile payments, a cardholder occasionally needs to access the 16-digit card number, expiration date, verification digits, and a customer service phone number, all of which are hidden on virtual cards. Accordingly, the Digital First Program mandates that access to this information should be quick and secure — as quick as fetching a plastic card.

Preparation

The issuer will personalize and send a plastic version of the digital-first card in the likely event that an applicant requests it. However, the plastic version will look different from what we are accustomed to.

Plastic cards will not have embossed (raised) card numbers, expiration dates, and cardholder names. Those details will reside on cardholders’ mobile wallet apps. As an aside, the embossing of credit cards hasn’t been useful or necessary since the mid-’80s when electronic card readers replaced the manual, carbon-copy impression and receipt machines, the so-called “knuckle-busters.”

Merchants can do two things to prepare for the imminent arrival of digital-first cards. First, configure ecommerce checkouts on websites and apps to accept payments from mobile wallets such as Google Pay, Apple Pay, and others. Second, prepare for an increase in card-not-present fraud, the result of instant card-application approvals. Fraud-prevention technology is improving, but more fraudulent applications will inevitably be mistakenly approved.

The Wirecard Fiasco: Digital Payments Gone Wrong

What would you do if your credit card processor and merchant account provider were fraudulent? That’s the reality for many thousands of worldwide businesses that relied on Wirecard, the Germany-based financial technology firm that is now in bankruptcy proceedings, having committed, allegedly, sham practices for years.

I’ll describe the Wirecard fiasco in this post. It’s shocking because of the apparent widespread level of fraud and the lessons for the digital payments industry.

Image of Wirecard headquarters near Munich, Germany. Source: Wikipedia.

Wirecard headquarters near Munich, Germany. Source: Wikipedia.

A Sketchy Start?

Wirecard is a multinational payment processor, merchant acquirer, card issuer, and technology service provider. The company declared bankruptcy in August 2020. It was listed on the German DAX, a notable stock index similar to the Dow Jones Industrial Average.

Wirecard launched in 1999 as a payment-technology company. In 2002, Wirecard’s then CEO, Marcus Braun (who is now under arrest), shifted strategy to processing payments for, mainly, gambling and pornography websites.

In 2005, Wirecard raised funds by issuing shares in the Frankfurt Stock Exchange through a reverse IPO, having purchased the listing of a failed call center company named InfoGenie. This allowed Wirecard to expedite going public and, some would say, avoid much of the scrutiny.

With the new capital, Wirecard acquired a German bank called XCOM, which held international merchant acquiring and card issuing licenses, thereby allowing the newly created Wirecard Bank to become both a worldwide issuer and acquirer. Purchasing companies for their licenses is fairly common.

The XCOM transaction transformed Wirecard into a sprawling, complex business. In the ensuing 14 years, Wirecard allegedly used this complexity to artificially inflate profits, hide massive losses, forge contracts, and dupe investors, auditors, and regulators.

Rise and Fall

From 2006 to 2018, Wirecard expanded aggressively. It acquired several smaller, Asia-based payment processors, an Indian payments company, and several Citibank-owned processing and prepaid-card portfolios in Asia and North America.

Business for Wirecard was, reportedly, booming. At its peak in 2018, Wirecard’s public valuation was €24 billion (roughly USD $28 billion at the time of writing). The company had 5,000 employees and claimed to process payments for 250,000 merchants worldwide in addition to its card-issuing and technology operations. Wirecard replaced one of Germany’s largest banks on the DAX-30 index.

So, what went wrong?

A lot. It’s useful to examine the scandal’s timeline to understand the level of fraud, collusion, and deceit. The Financial Times, which exposed the apparent depth of the scandal, offers excellent coverage.

  • 2015 and 2016. The Financial Times and short-sellers begin to probe. BaFin — Federal Financial Supervisory Authority, Germany’s principal financial regulator — sides with Wirecard. As far back as 2008, a small group of Wirecard shareholders complained about what they believed were accounting irregularities. Wirecard hired Ernst & Young, the accounting firm, to investigate. The complainants were silenced, two investors were prosecuted for insider trading, and Wirecard escaped unscathed. Ernst & Young would become Wirecard’s outside auditor for the next 11 years.
  • 2008 through 2015. Wirecard expanded rapidly and, for the most part, avoided controversy. In 2015, however, a Financial Times report alleged significant accounting problems in, primarily, Wirecard’s payment-processing business. Later in 2015, a group of short-sellers claimed that Wirecard’s operations in Asia were much smaller than reported by the company.

Nonetheless, Wirecard acquired a payment processor in India for, reportedly, €340 million (USD $401 million). The Financial Times later alleged that Indian shareholders never received €175 million to €285 million from the sale.

  • 2016. A group of short-sellers published allegations against Wirecard, including money laundering. BaFin, the German regulator, investigated but ultimately sided with Wirecard. This became a recurring pattern: Whistleblowers and journalists accuse Wirecard of improprieties, and regulators side with the company.

Unscathed, Wirecard acquired Citigroup’s North America prepaid-card business, giving Wirecard a foothold in the U.S.

  • 2018 to 2019. In early 2018, a whistleblower in Wirecard’s Singapore office alleged that the company was defrauding investors by engaging in “round-tripping,” a practice of selling something and then refunding the buyer later — the sold assets are never transferred from the seller to the buyer. The transaction is fake (and illegal).

Concerned employees in Singapore took this accusation seriously and initiated an internal investigation. In October 2018, the employees contacted The Financial Times, which published a report on Wirecard’s Singapore operations. Another BaFin investigation occurred. Singaporean law enforcement became involved, leading to a raid of Wirecard’s offices.

BaFin regulators, again, sided with Wirecard. BaFin announced a two-month prohibition on short-selling Wirecard’s stock, claiming that Wirecard is too important to the health of the German economy.

  • 2019. Fake companies and fake profits. In March of 2019, The Financial Times published a report claiming that roughly half of Wirecard’s revenue and most of its profit are from referral fees with smaller processor partners. This isn’t unusual as most large processors work closely with merchant account providers and other partners.

But many of Wirecard’s processing partners did not exist. They were fake. Indeed, when they attempted to visit the offices of Wirecard’s partners in the Philippines, reporters discovered dwellings of uninvolved residents.

Wirecard’s response was to sue The Financial Times and the Singapore authorities, who earlier had named five Wirecard employees and eight partner companies as suspects in a criminal investigation.

Ernst & Young, the auditors, approved Wirecard’s 2018 financial statements and recommended only minor compliance procedures for Wirecard’s Singapore office.

  • October 2019. The Financial Times reported that profits from Wirecard’s operations in Dubai and Ireland were also inflated and that even more of the company’s partners did not exist. Pressure mounting, Wirecard appointed KPMG, another accounting firm and a competitor to Ernst & Young, to conduct an audit.
  • 2020. Wirecard’s demise. After a series of delays, KPMG published its reports. The findings shocked investors, BaFin, and the German police.

KPMG challenged the authenticity of Wirecard’s profits from 2016 to 2018, citing a glaring lack of evidence, such as no bank statements showing income received. KPMG could not confirm at least 34 Wirecard clients and at least €1 billion in cash. Wirecard had fabricated at least three years of profits.

In early June, German authorities raided Wirecard’s headquarters and launched a criminal investigation against Wirecard’s CEO and several other executives.

On June 16, two Philippine banks disclosed that documents provided by Wirecard to authorities to support €1.9 billion in cash balances are “spurious” (fake). Two days later, Wirecard announced that the €1.9 billion is “missing.” Wirecard’s stock price crashed, and its creditors called in approximately €2 billion in loans.

Following its CEO’s resignation, Wirecard’s new management acknowledged the colossal scale of a multi-year accounting fraud, adding a “prevailing likelihood” that €1.9 billion that was supposed to be in its accounts does not exist.

On June 25, following the arrest of its former CEO, Wirecard announced that it would file for insolvency (bankruptcy).

The Potential of Real-time Payments for Ecommerce

Real-time payments are immediate transfers of funds from a payor to a payee. The topic is trending and for good reason. The promise of immediate settlements and instant access to funds is compelling, especially for merchants frustrated by their bank’s policy of holds and reserves.

The term “real-time payments” can describe a range of rapid money transfers. The true meaning includes:

  • The transfer of funds from a payor to a payee within seconds — not minutes, not hours, and certainly not days. It’s called an “immediate settlement.”
  • Unrestricted access by the recipient to the full amount of the transfer with no reserves, holds, or limitations on the use.
  • Irrevocable transfers. Once received, the funds transferred via a real-time payment cannot be called back or rescinded by the sender.

Use Cases

There are five popular uses cases for real-time payments.

Real-time settlements for merchants, who would benefit greatly if they could immediately use the funds in their merchant account for, say, purchasing inventory, paying employees, and covering expenses. Most accounts require a hold period, ranging from one to 14 days, depending on the size of the reserve, the amount of funds, the merchant’s account status, and the type of business.

Traditionally, merchant accounts are not settled in real-time because acquiring banks (i.e., merchant account providers) must request and receive authorizations from issuers and other participants in the payments ecosystem. Acquirers also prevent immediate access to funds to protect against chargebacks.

A handful of merchant account providers now offer some form of real-time settlements to help smaller, independent businesses amid the pandemic. The most prominent is Square’s Instant Payments feature, which allows merchants to fund payroll with their Square account balance. However, a lot more could be done. The technology exists, and the potential is enormous, but the implementation has been slow.

Real-time payments for employees, contractors, and freelancers. Merchants are not the only ones harmed by slow, cumbersome settlements. Employees, contractors, and freelancers often struggle because of delayed payments. Real-time payments can speed up the process. For example, for a small fee, a Lyft driver could use Lyft’s Express Pay to cash out his earnings before the usual weekly deposit.

Replacing paper checks. Insurance companies, governments, and other organizations realize significant cost savings and improved customer satisfaction with real-time payments instead of the much-maligned paper checks, which are expensive to produce, distribute, and process. Fraudsters target paper checks. They are easy to lose and slow to receive.

Cross-border payments. Sending and receiving money across international borders is inconvenient. It’s common for an international money transfer to take two weeks or more to settle — an unconscionable timeframe given the maturity of the internet. Real-time payments can expedite international money transfers without compromising security. Indeed, both MoneyGram and Western Union have announced efforts to use Visa Direct (the company’s platform for real-time payments) for certain cross-border money transfers.

Peer-to-peer payments are popular as a simple, safe, and cost-effective way to transfer funds from one person to another without handling checks or cash. P2P payments are sometimes (but not always) a type of real-time payment. Again, a valid real-time payment facilitates instant transfers and immediate and unfettered access to all of the funds. Most P2P apps do transfer instantly, but not all allow immediate access to the money.

Real-time Networks

Several systems have been developed to provide real-time payment capabilities, and many more are on the way. Here is an overview of the most recognizable real-time payment mechanisms.

Visa Direct and Mastercard Send use OCTs (“original credit transactions”) in their real-time payment networks. OCTs credit funds from a payor’s credit or debit card to a payee’s card. They are similar in concept to a refund wherein a company puts money back into a customer’s credit card account. OCTs can be pushed only to a Visa or Mastercard account, never to a bank account.

Corporations, governments, and technology providers are migrating to Visa Direct and Mastercard Send to disburse payments in real-time. Funds are transferred to the cardholder within seconds, and the recipient can use those funds immediately.

The RTP Network allows U.S. banks and their customers to transfer funds to and from accounts in real-time. The RTP Network was created by The Clearing House Payments Company, a for-profit joint venture of large banks and financial institutions. All participating banks support real-time money transfers with immediate settlement.

The RTP Network is mainly used for B2B  payments. Not all banks are members as it involves maintaining large reserves at a Federal Reserve Bank and investing in employees and technology to support and grow the service. Approximately 56 percent of U.S. checking-account holders are eligible for real-time payments via the RTP Network. Smaller financial institutions have been reluctant to join because of the cost and the desire to remain independent from the gigantic competitors that control the network.

FedNow Service. The Federal Reserve recognizes that real-time transfers are essential for a healthy payments ecosystem. Further, the Fed also understands that smaller institutions are hesitant to join the RTP Network, thereby preventing many accounts from participating. The result is FedNow Service, the Fed’s own real-time payments network, which will operate like the RTP Network. Unfortunately, FedNow will not launch until at least 2024.

Challenges

Real-time payments have great potential to help merchants. However, there are challenges to overcome before such payments are ubiquitous.

  • Security and privacy protection. As more people access real-time payment networks, the threat of security breaches, hacks, and account takeovers (from phishing and social engineering attacks) will grow.
  • Fraud. Because real-time payments are immediate and irrevocable (i.e., they cannot be called back), the networks will have to invent processes and technologies that counteract fraudsters.
  • Seamless integrations. Real-time payment platforms will have to integrate with other business-critical systems such as accounting and cloud-based management platforms. It’s not good enough to facilitate real-time payments alone.
  • Regulations. Laws and regulations that prevent money laundering and the illegal use of funds — drug and weapon sales, for example — will need to be updated to include real-time payments.
  • Fees. It’s difficult to say if real-time payment fees will rise, fall, or remain constant. However, one can be sure that there will be costs to maintain these systems, and end-users will ultimately pay.

4 Payment Methods to Integrate for the Holidays

Convenience and security increasingly impact online selling. That’s especially the case for the upcoming holiday season, as consumers will likely seek flexible, seamless payment options.

Here are four payment methods to consider for this year’s holiday selling.

4 Payment Methods

Buy now, pay later. Expect this method to gain momentum for the 2020 holidays. Unlike traditional layaway, where consumers make payments on products before taking delivery, BNPL allows customers to pay for purchases over time after receiving the goods. Merchants process these orders like any other.

The latest offering is PayPal’s “Pay in 4,” which lets customers pay for orders from $30 to $600 interest-free over six weeks. Merchants receive the money upfront and pay only the standard PayPal rate. PayPal assumes all the payment-acceptance risks.

There are other BNPL  options, such as Afterpay and Klarna. But Pay in 4 brings with it PayPal’s 300 million global users, which dramatically increases the chance of a customer already having an account.

Apple Pay. The number of iOS and macOS devices pales in comparison to Windows and Android OS. Still, on average, Apple users spend more money per transaction — up to three times as much. They’re also more apt to purchase nonessential items and luxury gifts.

Apple Pay is a preferred method for many consumers because of its efficiency and security. Consumers keep their credit card info on file with one source — Apple — and merchants receive the information needed to process the order. Apple Pay can also work on Macs. Thus consumers don’t have to use their iPhones to complete a transaction.

There’s typically no additional charge to merchants to accept Apple Pay. Merchants pay their normal credit-card rates. But merchants do need a shopping cart that supports Apple Pay.

MacBook laptop on iPhone working via Apple Pay on an online store

Apple Pay integrates with macOS and iOS devices for a quick and seamless checkout. Source: Apple.

PayPal, Venmo. PayPal and Venmo have been the most-used methods to send money to family and friends during the pandemic. Now, with many of those accounts having positive balances, consumers are more likely to pay with them rather than transfer funds to bank accounts.

While Venmo hasn’t yet rolled out business accounts, consumers can pay with Venmo funds via PayPal. For this to work for ecommerce purchases, merchants should integrate PayPal with their checkout. Instead of a Venmo button, consider making a “Venmo accepted” indicator.

Beyond Venmo, consumers can store credit card details with PayPal, paying merchants with a single tap.

Amazon Pay. Expect to see more shoppers using Amazon Pay this year. The reasons are three-fold: Amazon Pay ensures security and privacy; consumers have Amazon gift card balances to spend; and, for many, it’s convenient as, like Apple Pay and PayPal, their credit info is saved there.

Beyond Credit Cards

Traditional credit card payments require consumers to enter their shipping, billing, and payment information. But the methods discussed here transfer those details automatically. The customer does little more than confirm the shipping address and shipping method before the order is complete.

PayPal and Amazon Pay do more than credit-card providers to protect merchants, which decreases the risk of illegitimate chargebacks. That alone can save merchants time and money, making slightly higher discount rates worthwhile.

Moreover, Apple, PayPal, Venmo, and Amazon come with huge built-in audiences. Some of those users will likely seek out participating stores.

None of these methods will replace credit cards. But the benefits to merchants are substantial. Implement the ones you can to gain additional traction this season.

Understanding P2P Payments for Merchants

P2P payments occur between two people. The term stands for both “peer-to-peer” and “person-to-person.” Giving $20 to a friend for your share of last night’s dinner bill is a type of P2P payment. Paying a co-worker for the office gift fund is another.

P2P payments once involved only cash. They now include electronic funds. Square’s Cash App claims over 30 million users. Venmo, another popular app, has more than 60 million. And PayPal, the original P2P money-transfer provider, has close to 350 million active users.

Instead of using credit cards, consumers are now purchasing goods and services with P2P apps, and merchants increasingly accept P2P payments. In a sense, many merchants have become “peers” to capitalize on the trend.

Consumer Perspective

Most P2P payment apps have a similar look and feel. The consumer downloads the app, registers, and then links to either a credit card, debit card, or a bank account — collectively known as funding sources. The app transfers funds from one of these sources to the other person in the transaction. The recipient usually receives the funds immediately and can deposit into a linked bank account or retain in the app to use later.

The consumer’s perspective of P2P payments using the PayPal app.

The consumer’s perspective of P2P payments using the PayPal app.

Merchant Perspective

Merchants can accept P2P payments in one of four ways.

1. Peer-to-merchant, wherein merchants act as the recipient of a P2P transfer. This type of payment is best suited for smaller, independent merchants and occasional sellers at, for example, arts and crafts fairs, farmers’ markets, and bake sales.

2. P2P for businesses. Popular apps such as PayPal, Venmo, Zelle, and Square Cash App offer business profiles, where merchants can create and display a QR code to their customers. The QR code can appear anywhere: inside or outside a store; on print media such as business cards, signs, and flyers; and on websites. Customers initiate payments by scanning the QR code, which will open the merchant’s P2P app on the customer’s phone. An additional benefit of business profiles is that merchants can list in the app’s directory, thereby connecting with new customers.

Using P2P business profiles, such as this example from Venmo, merchants appear in the app’s directory, thereby connecting with new customers.

Using P2P business profiles, merchants can appear in the app’s directory, thereby connecting with new customers. This example is from Venmo.

3. P2P as an ecommerce checkout method. Ecommerce merchants can add P2P buttons to their checkout pages. The user experience is similar to the familiar “Pay with PayPal” option. Using Venmo, for example, after selecting the “Venmo” button, customers enter their Venmo account details and authorize the money transfer to the merchant. Customers fund the transaction from their linked bank account, credit or debit card, or their balance at Venmo. The merchant receives the payment in full, minus a transaction fee (more on this below), regardless of the customer’s choice of funding source.

After selecting the "Venmo" button, customers enter their Venmo account details and authorize the money transfer to the merchant.

After selecting the “Venmo” button, customers enter their Venmo account details and authorize the money transfer to the merchant.

4. Payment requests are appropriate for smaller service providers such as gardeners, tutors, and freelancers. Most popular P2P apps allow users to request money. Business owners can use the app to generate a “pay me” link and send it to a customer via text message, email, or social media. The customer then clicks the link and is guided through the process of transferring funds.

Service providers can use P2P apps to generate a “pay me” link and send it to a customer via text message, email, or social media,. This example is from PayPal.

Service providers can use P2P apps to generate a “pay me” link and send it to a customer via text message, email, or social media. This example is from PayPal.

Merchant Fees

For the privilege of accepting P2P payments, merchants can expect to pay fees. Fortunately, the fees are relatively low compared to accepting credit cards.

Merchants do not have to obtain point-of-sale equipment (scanners, registers, PIN-pads) or merchant accounts. All that’s required is a computer or a smartphone and an account with one or more P2P providers.

There is no charge for creating a business account with Zelle, PayPal, Venmo, and Square’s Cash App. None of these providers charge a fee for receiving P2P payments. Venmo does not charge for business profiles (i.e., Venmo business accounts), but, according to Venmo’s documentation, merchants accepting payments via their business profile could, in the future, incur a per-transaction fee of 1.9 percent + $0.10.

The only charge applicable to most business owners is an instant-deposit fee, which varies from provider to provider but usually ranges from 1.0 – 1.5 percent of the transaction amount. Venmo caps its instant-deposit fee at $10; Square’s Cash App does not offer a cap. Zelle has no deposit fee because it’s a value-added service from banks.

Merchants can avoid the instant-deposit fee by waiting 1 and 5 business days before transferring funds from the P2P account to their linked bank account. This is called the hold period: the amount of time that the P2P app will hold funds before allowing free transfers to linked bank accounts.

Currency conversion is another potential fee. PayPal allows cross-border payments, but other providers do not. Upon receiving a P2P transfer from a foreign customer, PayPal will convert to your local currency and charge $3 for the service. And the exchange rate that PayPal applies will be more costly than foreign exchange providers.

Finally, P2P payments are not appropriate for every business. Most should still accept traditional credit cards, which come with a vast array of fees.

What Merchants Should Know about ‘Buy Now, Pay Later’

“Buy now, pay later” allows consumers to purchase goods and pay in installments, similar to a credit card. Why is BNPL gaining popularity? I’ll answer that question and more in this post.

Using BNPL, approved customers can defer payments at checkout — online and in-store. BNPL providers pay the merchant in full, minus a service fee, while the customer pays the provider in agreed-upon installments.

BNPL is also known as “pay-over-time,” “point-of-sale financing,” and “point-of-sale loans.” Providers tend to describe their services slightly differently, even though the basics are more or less the same.

Ecommerce merchants typically display a BNPL payment button alongside the usual credit-card and PayPal logos, and any other payment method. The example below is from Affirm, a leading BNPL provider.

Ecommerce merchants typically display a BNPL payment button alongside the usual credit-card and PayPal logos

Ecommerce merchants typically display a BNPL payment button alongside the usual credit-card and PayPal logos. Source: Affirm.

When a customer chooses the BNPL option, the provider will conduct a real-time credit check. If the customer is approved, the provider will display to the customer the terms of service — the repayment schedule. From there, customers can check out as usual.

The three types of BNPL services are fixed, flexible, and micro-loans. A fixed offering sets the repayment schedule in advance of the purchase so that the customer knows the number and amount of installments.

A flexible BNPL service allows the customer to select the number of payments — typically three to 36, depending on the value of the purchase and the merchant’s agreement with the provider. The customer’s creditworthiness is also a factor.

Micro-loans, the third type of BNPL, grants a small loan to the customer before completing the checkout. The customer will typically pay a flat fee to the BNPL provider and will agree to a fixed repayment schedule.

Interest, Penalties

Unlike credit cards, many BNPL providers do not charge explicit interest and penalties, including late fees. Some charge interest only for missed payments; others charge a flat fee when payments are late. BNPL providers promote their repayment plans as more transparent and easier to manage than credit card debt.

BNPL providers compete with the issuers of credit cards. Both offer loans and allow buyers to pay for purchases over time. Both earn money by charging fees to merchants and buyers.

However, customers view buy-now-pay-later and credit cards differently. Credit cards have hidden fees, compounding interest, and various penalties. BNPL is more transparent — fees, rates, and payment schedules are usually displayed clearly and explained in simple, customer-friendly terms.

For merchants, accepting BNPL is similar to accepting credit cards. Merchants pay a fee (or lots of fees) to complete a sale.

BNPL Costs

Merchants usually pay a BNPL charge ranging from 2 to 8 percent of the purchase amount. Some providers also charge a flat fee of 30 cents per transaction.

A rate of 2 to 8 percent is higher than a typical credit-card discount rate, which is usually around 2.9 percent plus 30 cents for card-not-present transactions (ecommerce) and about 1 percent less for card-present purchases (in-store).

However, it’s difficult for inquiring merchants to determine the exact BNPL costs because providers rarely disclose pricing without a merchant registering for an account and submitting payment-volume estimates and other info. Merchants should expect to deal with a provider’s sales staff before receiving a quote.

Most providers will deposit funds, minus the fee, in a merchant’s account within two business days. This, again, is similar to credit cards.

Why Accept BNPL?

Why are an ever-increasing number of merchants offering BNPL options if the fees are expensive?

Here’s why.

  • Larger purchases, more conversions, reduced cart abandonment. By offering lower monthly payments and more time to pay, merchants can use BNPL to reduce sticker shock and increase conversions. Affirm claims that merchants will experience an 85-percent increase in average order value when customers use its BNPL services. Afterpay, another provider, asserts a 40-percent AOV increase and a 22-percent increase in cart conversions.
  • Consumers are shunning credit cards — especially millennials (ages 20 to 40, roughly) and Gen Z (15 to 20). Some shoppers are looking for more transparent ways to manage their finances instead of hard-to-decipher credit cards. BNPL offers payment plans that are simple to understand and potentially easier to pay off.
  • Low cost of customer acquisition, particularly during the pandemic. Merchant fees for BNPL transactions (as high as 8 percent) are a small price for many businesses to obtain new customers.
  • Holiday shopping in 2020. Shoppers this year will likely seek flexible ways to pay for gifts. BNPL could be the feature that sets your business apart. Move quickly, though. Amazon is already implementing BNPL through a partnership with Citi.
  • No chargeback risk. Unlike credit cards, most (but not all) BNPL providers assume fraud and chargeback risks. With the right BNPL partner, merchants don’t have to worry about fraudulent payments.

Is Apple Entering the Payment Acceptance Business?

In July, Apple acquired Mobeewave, a relatively unknown payments-technology startup in Montreal, Canada for, reportedly, $100 million. For nine years, Mobeewave has been developing technology to convert conventional smartphones into payment-accepting devices without requiring additional hardware components.

What may seem to be just another acquisition for Apple could have broad implications for the payments industry.

Mobeewave enables smartphones to be payment-accepting devices without additional hardware components.

Mobeewave enables smartphones to be payment-accepting devices without additional hardware components.

mPOS

Before digging into the Mobeewave acquisition and how it threatens the status quo enjoyed by Square and others, some background on mobile point-of-sale (mPOS) is useful.

The “Great Recession” of 2008 prompted many merchants and the entire payments industry to find a better way of serving customers.

Ecommerce had made huge gains by providing improved service, better prices, and unprecedented convenience. Brick-and-mortar stores had to react. One of the industry’s responses was mobile points of sale — the ability for merchants to leave the front checkout counter and accept credit and debit card payments throughout the store.

Around this time, Square, with its card reader that easily plugged into a smartphone’s headphone jack, made big strides. By allowing merchants to accept payments from anywhere, Square profoundly changed the payments industry. It wasn’t long before others, such as Clover, improved on Square’s offering with mPOS services that supported chip-and-PIN and contactless tap-to-pay.

Traditional acquirers and payment processors were slow to respond to this massive shift in the small-to-midsize business segment. Eventually, the leading processors either developed their own mobile point-of-sale products or partnered with one or more mPOS providers. This is where the industry stands today.

Evolution of mPOS

For all of the interesting use cases and convenience that mPOS provides, it does have one major fault: separate hardware is required. Merchants can accept card payments on their phones and tablets only if a card reader or a card-reading PIN-pad is connected either wirelessly via Bluetooth or physically with a dongle, cable, or plug.

Carrying and connecting a small card reader or a mini PIN-pad isn’t horrible, but it certainly reduces the convenience. All of this hardware must be charged, maintained, and secured. Worst of all, it’s often expensive.

Several startups — Mobeewave was foremost — understood that mPOS is more viable without all the cumbersome dongles, readers, and PIN-pad attachments.

Unfortunately for Mobeewave (but fortunate for the traditional players), the separate hardware was necessary. That’s because Visa, Mastercard, and the other card brands allowed mobile payment transactions only if the hardware was certified (for security) by organizations such as PCI Security Standards Council and EMVco.

And PCI and EMVco correctly understood that transmitting credit card details through a smartphone alone was not secure and, thus, could not be certified.

New Technology, Certifications

New technology and certification standards arose in roughly 2018 to overcome the security challenges of passing credit card data through smartphones. While the acronyms are seemingly impossible to decipher, the underlying benefits are clear.

  • TEE (Trusted Execution Environment). An extremely secure area of memory in a smartphone that protects credit card details without the need for separate hardware. Mobeewave’s phone-only mPOS solution relies on TEE.
  • EMVco. A private organization comprised of representatives from Visa, Mastercard, American Express, Discover, JCB, and China UnionPay. EMV is the acronym for Europay, Mastercard, and Visa — the founders and original members of EMVco. EMV creates and maintains rules and regulations for chip-and-PIN, contactless, and electronic payments.
  • PCI SSC (Payment Card Industry Security Standards Council). The independent organization that works with EMVCo to create, maintain, test, and certify a wide range of electronic payment services, including mPOS.
  • COTS (Commercial Off-the-shelf). A fancy way of saying “a smartphone or tablet that was purchased from a store,” as opposed to buying a traditional card reader and PIN-pad from a factory (typically operated by an acquirer).
  • CPoC (Contactless Payments on a Commercial Off-the-shelf Device). A new standard and certification program from the Payment Card Industry Security Standards Council that outlines the rules for allowing tap-to-pay payments directly on smartphones with near field communication (NFC) capability. Mobeewave became a viable business as soon as this standard was released.
  • SPoC (Software Payments on COTS). Similar to CPoC, this standard covers PIN entry directly on the phone wherein customers can type their PIN directly on the phone’s glass touchscreen.

Mobeewave

The new technology and standards gave Mobeewave and a few other startups the opportunity they needed.

The startups recognized that attaching card-reading hardware and PIN-pads to phones is a burden for most merchants. Mobeewave solved the technical problem of attachment-free mPOS a long time ago. However, Mobeewave’s solution was never fully certified by PCI and EMV, thereby making the solution attractive but unusable except in demos and laboratories.

Once TEEs (secure areas of memory in the phone) became prevalent in modern smartphones — and as soon as PCI released the CPoC specifications — Mobeewave became a market-ready mPOS product.

Indeed, in October 2019, Samsung and Mobeewave announced a partnership and a service called Samsung POS, which allowed merchants to accept tap-to-pay payments on Samsung tablets and phones — without cables, dongles, or other hardware. The partnership, which was limited to Canadian merchants, generated more than 10,000 downloads of the Samsung POS app.

Square would have surely been aware of the Samsung POS pilot but likely didn’t feel threatened. Until now.

Apple Acquires Mobeewave

When Apple announced that it had acquired Mobeewave, a shockwave rippled through the payments industry. Suddenly, this small Canadian startup, with a compelling but poorly marketed mPOS product, could threaten established point-of-sale manufacturers, mPOS providers, and merchant acquirers.

Here’s why.

  • The proliferation of TEEs in Apple phones and tablets. Unlike Samsung and other Android phone manufacturers, Apple controls and builds the hardware and software that power its phones. Apple has the resources (financial and human) to build strong TEEs on its phones. Over time, the proliferation of Apple TEEs on Apple devices will presumably get better at handling, storing, and transmitting credit card data. Very few companies can secure an entire payments ecosystem. Apple can, and relatively easily.
  • Worldwide popularity. Despite their hefty price tag, iPhones and iPads are popular worldwide. Apple can leverage the iPhones and iPads that many merchants are using or planning to purchase. Adding an out-of-the-box payments-accepting service along with a potential point-of-sale app would be simple for Apple now that it has acquired Mobeewave. An Apple POS or mPOS application would be another reason for merchants to buy Apple products.
  • Marketing power. Traditional acquirers and providers of POS and mPOS systems do not have the marketing arsenal of Apple. With its seemingly unlimited marketing budget, Apple could out-spend other industry players — banks, processors, acquirers, and even hardware manufacturers (such as Ingenico and Verifone).
  • Experience. Apple has invested heavily in payments-related products, notably Apple Pay and the relatively new Apple Card (a partnership with Goldman Sachs and Mastercard). The triumvirate of a payment product (Apple Pay), a payment card (Apple Card), and now, a payments-accepting app could push Apple to a leadership position in the payments industry. Many commentators feel that Apple has already achieved this status.

Companies that are likely threatened by Apple’s acquisition of Mobeewave include:

  • Square and its competitors. Square, Clover, iZettle, ShopKeep, Lightspeed, and Shopify POS should feel threatened. If Apple offered a free or low-cost, feature-rich mPOS that works on iPhones and iPads without the external hardware attachments, one would expect many merchants to leave Square. Pricing, ease of use, security, and support will be the key differentiators among the competing services.
  • Acquirers and payment processors, especially those acquirers that have partnered with mPOS providers such as Clover. Apple can use its power to reduce fees and improve merchant account services. Many merchants consider their processors and acquirers as necessary evils; many would leave if there were better alternatives. This is especially true for small-and-midsize businesses, which are Mobeewave’s primary target market.
  • Point of sale manufacturers such as Ingenico and Verifone provide equipment for merchants of all sizes. Typically, acquirers and ISOs (independent sales organizations, also called merchant account providers) purchase PIN-pads and payment terminals from Verifone and Ingenico and then add custom software before renting or selling this equipment to merchants. Merchants that use iPhones, instead, are a threat to these hardware manufacturers.
  • Peer-to-peer payment services such as PayPal, Venmo, and Square Cash. Apple could create its own P2P payment service using Mobeewave’s technology. Rather than using PayPal, Venmo, or Square Cash to send funds to a friend, consumers could use an iPhone to accept a quick credit-card tap-to-pay payment. This presumes Apple can overcome the challenge of interchange and credit card fees.

Do Contactless Payments Impact Vulnerable Consumers?

Many brick-and-mortar merchants have implemented tap-to-pay systems during the pandemic. Customers and employees, fearing the spread of the coronavirus, are wary of handling cash and coins.

Starbucks, Chick-fil-A, and Lululemon have recently banned the receipt of cash. Many other businesses are refusing to accept cash or are pressuring customers to pay by tapping credit cards or smartphones. This shift away from cash is extraordinary. It wasn’t too long ago that merchants complained about the high costs of accepting credit cards.

There are other reasons, beyond Covid-19, why some merchants are eliminating cash receipts. Accepting cash, it turns out, can be more costly than paying interchange and other credit card fees.

But refusing cash payments has societal implications as it assumes all consumers have access to a smartphone or credit card.

Starbucks is one of many companies that have eliminated cash payments during the pandemic.

Starbucks is one of many companies that have eliminated cash payments during the pandemic.

Cost of Accepting Cash

There are costs for accepting, storing, and transferring cash.

  • Accepting cash requires registers. Simple cash drawers cost approximately $70, but most merchants need multiple drawers with locks, which typically integrate with the merchant’s point-of-sale system. Each register, all told, can cost several hundred dollars.
  • Businesses that accept cash must create related policies and procedures. Coins and bills have to be counted before, during, and after each shift. Transferring cash from the store’s safe to the registers involves additional bookkeeping, ledgers, and oversight. Cash, in other words, requires diligent accounting.
  • Merchants must keep sufficient bills and coins to provide change to customers. Counting coins and bills, and frequent trips to the bank, are time-consuming but necessary.
  • Cash requires enhanced security. Cash has to be stored safely and transferred securely. Not every merchant needs a Brink’s armored truck. But many do. Cash-accepting businesses must install safes or vaults and take precautions when moving cash to and from their bank. Security cameras, door access control (key fobs, badges, or codes), and alarm systems are common.

Impact of Banning Cash

At first glance, banning cash appears to be an appropriate response to combatting Covid.

But such a ban creates humanitarian hardships. Refusing to accept cash impacts vulnerable consumers, the people that have been hit hardest by the pandemic.

Roughly 6 percent of U.S. and Canadian residents do not have a bank account, and 20 percent have little or no access to credit cards. The policy of eliminating cash implicitly denies access to goods and services to those consumers, provoking the ire of governments, politicians, and special interest groups.

In January 2020, New York City passed legislation requiring businesses to accept cash from customers and preventing businesses from charging more for that form of payment. The bill’s sponsor wrote, “No longer in New York City will brick-and-mortar businesses have the right to refuse cash and effectively discriminate against customers who lack access to credit and debit. The marketplace of the future must accommodate the needs of vulnerable New Yorkers.”

New York City’s ban on cashless businesses echoes similar laws enacted by San Francisco, Philadelphia, and the states of Massachusetts, Connecticut, and New Jersey.

More recently, two U.S. senators, Robert Menendez (D-New Jersey) and Kevin Cramer (R-North Dakota), introduced a bill called “The Payments Choice Act.” This proposed legislation would prohibit physical-store businesses across the U.S. from declining cash payments.

Refusing Consumers?

The pandemic has forced brick-and-mortar merchants to think differently about how they accept payments. Bills and coins may carry the coronavirus. And managing cash is expensive. However, in the rush to eliminate cash, some merchants may be unintentionally refusing consumers with no access to tap-to-pay smartphones and credit cards.