Payments News Update – August 27, 2020

Legal and Regulatory Developments

SPOTLIGHT: TD Bank to Pay $122 Million to Settle Overdraft Claims Brought by Consumer Financial Protection Bureau
USA Today – August 21, 2020

TD Bank has agreed to pay $122 million in a settlement with Consumer Financial Protection Bureau over charges that it issued illegal overdraft fees. The Cherry Hill, N.J.-headquartered bank will pay $97 million to about 1.42 million consumers and a civil penalty of $25 million, the CFPB and the bank announced Thursday. TD Bank charged consumers overdraft fees for ATM and debit card transactions without obtaining their consent from 2014 to 2018, the agency says. The bank presented its optional Debit Card Advance program as a free service or benefit that came with new consumer checking accounts. As part of the program, TD Bank charges $35 for each overdraft, the CFPB says. In some cases, TD Bank had new customers sign the bank’s overdraft notice with the “enrolled” option pre-checked. In other cases, customers were enrolled without the program being mentioned, the agency says.

“In some instances, TD Bank engaged in abusive acts or practices by materially interfering with consumers’ ability to understand DCA’s terms and conditions,” the CFPB said in its announcement of the settlement. Consumers are not required to opt-in to overdraft programs, but transactions will usually be declined if your account has insufficient funds. TD Bank, which has more than 1,200 locations in the Northeast, Mid-Atlantic, North Carolina, South Carolina and Florida, did not admit to any wrongdoing under the civil settlement, it says in a press release. The bank continues to offer the optional overdraft service, “which is valued by customers and helps them avoid declined transactions due to insufficient funds,” it said. . . .

ECB Cautions Against the Power of Big Tech in Financial Services and Cloud Provision
Finextra – August 27, 2020

The European Central Bank has bemoaned the absence of an EU challenger capable of taking on the might of Big Tech cloud providers from the US. Responding to a European Commission consultation on digital financial services, the ECB states: “One important challenge in relation to digital finance will be to reassess the dependence of European financial service providers on non-EU providers of critical services and technical infrastructures (e.g. the “cloud”), while EU-based global players have struggled to emerge. This could lead to banks’ reliance on a few non-EU service providers and possible concentration issues at both entity and systemic levels.”

The ECB has actively supported the development of an EU bank-backed push to take on US card schemes Mastercard and Visa, but it holds little sway in the arena of cloud-based services as more banks move critical applications to the likes of Amazon Web Services, Microsoft Azure and Google Cloud. Similarly, the arrival of Big Tech companies in financial services is prompting a rethink of supervisory oversight based around the mantra “same activity, same risks, same supervision and regulation”. . . .

CFPB Launches Latest CARD Act Review; Seeks Feedback on Regulations
ABA Banking Journal – August 25, 2020

The Consumer Financial Protection Bureau is beginning its biennial review of the consumer credit card market, as mandated by the Credit CARD Act. The next report is due in 2021. This year, the bureau is also reviewing the economic impact of the CARD Act rules on small entities in order to “determine whether the rules should be continued without change, or should be amended or rescinded, consistent with the stated objectives of applicable statutes, to minimize any significant economic impact of the rules upon a substantial number of such small entities.”

Specifically, the bureau sought feedback on the scale of the rules’ economic impact; whether and how those impacts on small entities can be reduced; and other factors. Regarding the market review, the CFPB sought public feedback on credit card market structure and participants; card pricing structure; credit availability; and innovation in the card market. Comments are due 60 days after the request for information is published in the Federal Register. . . .

How the U.S. Postal Service Could Live on as a Payments Hub
PaymentsSource – August 25, 2020 (subscription required)

The 2020 election has tossed the U.S. Postal Service under extreme scrutiny, pressuring the institution at a time when it has become a potential catalyst for financial inclusion. The Trump Administration has alleged shortcomings in mail-in voting, aligning with cuts to postal activity and political altercations. Two main highlights are the House’s vote to allocate $25 billion to the USPS to shore up its finances and ban operational changes that have slowed mail delivery — a measure that has no chance of advancing past the GOP-controlled Senate or gaining Trump’s signature. The other is reports that JPMorgan Chase is in discussion with the USPS to offer ATMs, cash support and other financial services by leasing space in the postal network.

A USPS spokesperson said the post office offers limited financial services such as money orders and U.S. Treasury check cashing, adding the USPS would consider other services it can legally provide at a profit, but regulatory discussions must be addressed beforehand. The bank did not return a request for comment by deadline. As online banking and e-commerce accelerate during the coronavirus pandemic, the cost of managing paper money has become a challenge for the government, consumers and banks. For banks, cash creates labor costs and expenses in distribution, maintenance and processing, according to McKinsey, adding the rapid digitization of payments compounds that expense. The postal service can offset some of that overhead and expense, said Corey Stone, entrepreneur-in-residence at the Financial Health Network. . . .

Ant Group, the Alibaba Payment Affiliate, Files to Go Public
New York Times – August 25, 2020

Ant Group, the payment- and finance-focused sister company of the Chinese e-commerce titan Alibaba, filed paperwork on Tuesday to list shares in Hong Kong and Shanghai, the first steps toward what could be a blockbuster initial public offering. Online finance has exploded in China in recent years, and Ant’s flagship service, Alipay, has been a key driver. Relatively few people in China had credit cards when e-retail and other internet services began taking off in the country. That has helped app-based payments become far more ubiquitous in China than they are in the West.

In China, $67 trillion in transactions were conducted on mobile devices in 2018, according to estimates by the research firm Bernstein. Many of those took place through Alipay and WeChat, a rival digital wallet and messaging app owned by another Chinese internet giant, Tencent. Once people were using Alipay to stash their cash and pay for online purchases, Ant could begin offering them other kinds of services through the app, including personal loans and insurance policies. Alipay says it has 900 million users in China. . . .

CMA Greenlights Visa’s Takeover of Plaid
Finextra – August 25, 2020

The decision by the Competition and Markets Authority (CMA) follows a Phase 1 review in which it investigated several possible ways the deal could harm competition. Visa International Service Association (Visa) is a global leader in electronic payments. Plaid Inc. (Plaid) is a US-based technology platform provider that builds connectivity infrastructure, which enables digital apps to connect with a user’s bank accounts. In the UK, Plaid offers payment initiation services (PIS). These enable a consumer to make real-time account-to-account payments directly from a merchant’s app or website, providing an alternative to paying online using a credit card or debit card.

Visa announced in January 2020 that it had agreed to buy Plaid in a deal worth $5.3 billion. While Plaid is a relatively small player in the UK today, the CMA carefully considered its prospects for future growth within the payment services sector. The CMA’s investigation primarily focused on how the deal could affect competition in the UK consumer-to-business electronic payments sector in which Visa, through its card-based payments and Plaid, through its PIS-enabled payments, are both active. PIS-enabled payments remain at a relatively nascent stage within the UK but are increasingly gaining traction, in large part as a result of the open banking regime. . . .

Industry Developments

SPOTLIGHT: One-Third of Fuel Retailers Are Unlikely to Meet the April 2021 EMV Deadline, a Survey Reveals
Digital Transactions News – August 25, 2020

With less than a year to go before gas stations are scheduled to become EMV-compliant at the pump, readiness among fuel merchants remains uneven. A recent study by Naples, Fla.-based ACI Worldwide reveals 47% of major petroleum merchants remain unprepared to meet the deadline and 20% are still in the planning stages for rolling out EMV. By the time of the April 2021 deadline, 33% are unlikely to be able to comply, ACI says. Overall, 97% of the petroleum merchants expect to be EMV-compliant by year-end 2021, with the remaining 3% unsure of when they will achieve compliance. ACI surveyed 46,000 petroleum merchants nationwide, including major oil companies, grocers, and convenience stores. Visa Inc. and Mastercard Inc. have already extended the deadline from the original cut-off of Oct. 2017 to April 2021.

The delay in EMV implementation among gas stations, the last major merchant category to migrate to chip card readers, is largely to due to the high cost of implementing in-pump EMV card readers. Bringing a fuel pump, which typically has four nozzles, into EMV compliance costs about $25,000 to $30,000, on average, fuel industry experts say. The price can rise to $40,000 by adding such features as loyalty, fleet card, and third-party marketing/discount programs. By comparison, a fuel-pump replacement with a bare bones EMV card reader is about $20,000. “EMV is a major undertaking for fuel merchants—from the capital investment required to the fuel pumps that will be out of commission during the upgrade,” says Benny Tadele, vice president, for ACI Worldwide. . . .

How the Pandemic—and Consolidation—Reshaped the Acquiring Landscape
PaymentsSource – August 26, 2020 (subscription required)

If the mega payments deals of 2019 left the acquiring landscape somewhat scorched, the COVID-19 pandemic planted new seeds to allow ISOs to grow by quickly converting merchants to electronic payments. The 2019 mega-mergers were a significant bombshell in payments, and not just for their price tags — The FIS purchase of Worldpay was one of the largest ever in payments and fintech at $43 billion, while Fiserv paid $22 billion for First Data and Global Payments bought TSYS for $21.5 billion — but also because they created a new category of “jumbo” acquirers. The rest of the legacy acquirers were mostly concerned with what was happening downmarket, as newer outfits like Stripe, Adyen and Square took bigger bites out of the market. Long-standing acquirers/processors like Elavon and PayPal were also actively diversifying to win more merchant relationships.

With the advent of jumbo acquirers, legacy companies were being squeezed at both ends of the market. And while the coronavirus pandemic created far more complications for a business category that relied heavily on personal relationships and handshakes, it also gave those companies firmer footing to convert their customers to digital payments. “I think what is going on right now is the great thinning of the herd, just because of what is going on at the macro level,” Tim Willi, managing director and senior fintech analyst with Wells Fargo, said this week during the virtual Mobile Payments Conference. “There has been a lot of innovation and a lot of upstarts that were getting some traction over a variety of different industries and verticals now coming forward and we are seeing people’s true color shine.”

Umbrella Entities for Digital Payments Are on Their Way
Livemint – August 25, 2020

Pandemic Losses Make Merchants More Receptive to Credit Card Surcharging
PaymentsSource – August 25, 2020 (subscription required)

Advocates of allowing merchants to add a surcharge to defray the cost of credit card interchange have had to overcome network bureaucracy, state laws and even ingrained habits among the merchants themselves. But the strain of the COVID-19 pandemic may be the final push merchants needed to accept the option of adding a surcharge for card payments or a discount for using cash. Acquirers or independent sales organizations may also integrate the practice into their sales strategy, industry experts say. “Surcharging has been around for a long time, but many people didn’t understand it and it was very onerous on the merchant to be able to get themselves compliant and registered,” John Barrett, executive vice president of Payroc, said this week at the virtual Mobile Payments Conference. “In recent years, the technology has changed, so it is easy for a merchant to get registered and compliant, and the legal landscape has changed.”

Even though the card networks lifted their ban on surcharging in 2013 as a consequence of a decades-long antitrust lawsuit and eventual 2018 settlement, merchants weren’t quick to hop on board. After all, many states still banned it, regardless of what rules the card networks had. Today, only Colorado, Connecticut, Kansas and Massachusetts still ban surcharging. Retailers ultimately were given the right to include a surcharge when a customer presents a credit card, as long as signs at the point of sale make the practice clear and that merchants don’t charge more than 4% or what is needed to cover the credit card interchange fees. During the pandemic, those fees are more crucial than ever. . . .

Why American Express Acquired Small Business Specialist Kabbage
Banking Exchange – August 24, 2020

The deal, announced 18 August, sees the global giant supplement its armory with a broad range of payment, cash flow and financial management tools. It is the latest in the stream of fintech purchases by global finance institutions to rapidly extend their traditional reach. “For several years, American Express has been expanding beyond our industry-leading commercial card products to offer our business customers a growing set of payment and working capital solutions,” said Anna Marrs the company’s president of global commercial services. The news of the deal coincides with American Express’s Shop Small initiative, which encourages cardholders to favor participating local retailers by earning cash back on purchases. The initiative was launched in 2010 to help smaller businesses through the global recession that followed the 2008-9 financial crisis.

During the current global recession, prompted by the Covid-19 pandemic, Kabbage has also been actively assisting its small business base. It has launched a range of tools and solutions its customers can use to persuade their own clients back to spending with them. The acquisition, the finance details of which were not disclosed, will see American Express acquire both Kabbage’s Atlanta-based team and its full suite of financial technology products, data platform and IP built for small businesses. . . .

Amid COVID-19, Fintechs Use Debit to Boost Their Lending, Savings, and Investing Apps
Digital Transactions News – August 23, 2020

With underbanked consumers and gig workers looking for financial products to help them track spending, create savings, and manage debt, many financial-technology companies are layering debit products onto their core application to attract and retain customers. A driving force behind fintechs’ growing fondness for debit is that it is a way for them to keep consumer funds flowing through their systems, says Matt Withey, vice president, issuing products, for Sioux Falls, S.D.-based Meta Financial Group Inc. Attaching a debit account to a lending app, for example, allows the lender to deposit funds into the account and the consumer to access those funds using a debit card, which can boost the value of the lending product to the consumer. In addition, the lender profits by earning a fee on each debit card transaction made by its customers.

“A lot of fintechs are started to solve consumer financial needs,” Withey says. “One trend we are seeing is that consumers are showing a preference for using debit to make everyday purchases, especially low-ticket purchases, and fintechs are looking for ways to boost acquisition and retention. Layering in a debit solution helps fintechs achieve that goal.” Three areas where fintechs see debit as a value-added feature are lending, investing, and savings, says Withey. Gig workers, for example, can a use a debit account to receive payment and manage their money, including separating taxes out of their pay check and transferring money to a savings account. . . .

China’s Tencent Sets the Bar for Facebook Payments
Forbes – August 23, 2020 

“Facebook unveiled a new group to pursue payments and commerce opportunities and put David Marcus, co-creator of its Libra cryptocurrency project, in charge of the initiative. Called F2 internally, short for Facebook Financial, the team will run all payments projects, including Facebook Pay, the company’s universal payments feature that it plans to build inside all of its apps.” My take: Facebook faces some challenges to growing its payments business, including: 1) economics; 2) digital commerce; and 3) politics. Today, payments are the tail wagging the Facebook dog. Payments and other fees comprise just 1.5% of total revenue—and there’s no telling how that percentage is split between the two categories.

S&P Global warns, based on its analysis of rival platform Tencent’s economics, that “payments may not contribute much to Facebook’s bottom line.”
That’s an understatement. In contrast to PayPal’s roughly $18 fintech revenue per user, Tencent has less than a quarter of that at about $4 per user. In addition, margins on Tencent’s online advertising business is almost twice as much as the margin on its fintech business. As a percentage of the total average revenue per user (ARPU), ARPU from payments and other fees’ revenue per user has accounted for about 2% of total ARPU in the US and Canada, and 1.5% of worldwide ARPU. . . .

Deep Forget Credit Cards — in L.A., Now You Can Pay With Your Face
NNY360 – August 23, 2020

A new way to pay has arrived in Los Angeles: your face. As so-called contactless payments rise in popularity during the pandemic, a Pasadena company called PopID is rolling out the nation’s first payment system based on facial recognition at a smattering of restaurants near its headquarters, including mom-and-pop operations such as Daddy’s Chicken Shack and regional chains such as Lemonade. The system is simple: A customer signs up on their phone, takes a selfie and adds cash to their Pop Pay account from a credit card or bank account. When it comes time to pay for their meal, they look into the camera of a PopID tablet or kiosk (no smiling necessary), the cashier verifies their name, and money is withdrawn from the account.

For customers, the experience is eerily seamless, at least when it’s functioning properly. (The software struggles at recognizing faces with masks.) For restaurants, the service is fast and cheap, assuming customers sign up for it. Easier ordering can speed up lines, and PopID is offering lower fees to process each payment than other payment processing or credit card companies. In China, more than 100 million people signed up for a similar face payment system in 2019 after 7-Eleven installed it at hundreds of locations, tech giant Alipay is rolling out face payments across the country, and, since July, commuters in the southern city of Guiyang have been able to pay their bus fare using their face. . . .

E-Commerce Sales Jump 87% in July, Report Finds
Digital Transactions News – August 21, 2020

Consumers shopping online in July purchased a lot more products associated with home-based and outdoor activities, contributing to an 87% increase year-over-year in sales for the month. That’s one data point from the Signifyd E-Commerce Pulse Report for July released this week. San Jose, Calif.-based Signifyd Inc., a fraud-prevention company focused on e-commerce, said leisure and outdoor online sales increased 134% year-over-year, perhaps a reflection of the continuing effects of the Covid-19 pandemic. Electronics sales soared 108% and the commodities and collectibles category, which includes precious metals, increased 183%.

The report indicates consumers have decided to stay with online shopping behaviors formed earlier during the lockdowns imposed after the onset of the coronavirus pandemic. “Five months into the pandemic, curbside pickup has not lost its luster,” the report says. “Drive-up shopping opportunities were few and far between before the pandemic. And then suddenly it was the only option for those who wanted to buy things from retailers that had been deemed non-essential. “By mid-April, buy-online-pick-up-at-the-store orders on Signifyd’s Commerce Network were running nearly 500% higher than they were at the beginning of the year. The most recent Ecommerce Pulse data shows that buy-online-pick-up-at-the-store-or-the-curb orders are still nearly three times what they were in January.” Many retailers and observers are monitoring this behavior and other indicators to see if these consumer habits developed during the Covid-19 pandemic will endure, Signifyd says. . . .

Mastercard: Inside the Samsung Pay ‘Super Card’
PYMNTS – August 20, 2020

Though the great consumer shift to digital is often seen as a side effect of the COVID-19 pandemic, that’s not entirely accurate, Mike Cowen, Mastercard’s head of digital payments for the U.K., Ireland, Nordics and Baltics told PYMNTS in a recent conversation. For a certain segment of the consumer and merchant population, that digital shift was already well underway pre-COVID. But for the later-adopting end of the market — the consumers and merchants that had heretofore shied away from digital — the past six months have marked the start of a transformation. “One of the effects of COVID has been [that] it’s driven much wider adoption among consumer groups that we wouldn’t necessarily have traditionally thought of as being fast adopters,” Cowen said. “It’s led to an acceleration of bringing in the wider populations. It’s similar in those segments of the merchant/retailer community that were slower to adopt contactless payments and also digital payments, where circumstances have really forced the acceleration of their adoption as well.”

As digital payments and digital commerce have expanded their penetration among consumers and merchants alike, the greater usage is pushing the pace of innovation in the segment. One of the most recent developments was this week’s announcement of the Samsung Pay Card powered by Curved and Mastercard technology. The new digital card, accessed through Samsung smartphones and watches, “collates” debit and credit cards from a range of banks onto a single platform to help users better manage their payments choice at the point of sale. . . .

Payments Will Help Lead a Post-Pandemic Rebound, a New Report Argues
Digital Transactions News – August 20, 2020

Payments are expected to play a significant role in the economic recovery that will take place as the Covid-19 pandemic eases, says a new report from Boston-Based Aite Group. The ways payments can help jump-start the economic recovery include reducing friction at the point-of-sale, increasing payment access, and integrating the digital and physical worlds of commerce, according to the report titled “The Impact of the COVID-19 Pandemic on Commerce and Payments.” “Right now, merchants are having a tough time attracting new customers and retaining existing ones, if either have any money to spend,” says Thad Peterson, a senior analyst for Aite and author of the report. “Anything that can be done to remove friction from payments can improve sales and help with customer retention.”

One way to reduce friction at the point-of-sale is to increase acceptance of contactless cards and mobile wallets, as doing so can help in-store shoppers avoid contact with POS terminals or with cashiers. Contactless card usage has increased since the pandemic hit the United States in March, according to a data round-up from the U.S. Payments Forum, a Princeton Junction, N.J.-based payments association. Visa Inc. reports that contactless card usage in the U.S. has increased 150% since March 2019. At the same time, mobile-wallet usage has grown in recent years, with 36.3% of global users having made a proximity mobile payment in 2019, the Aite report says. “Consumers have been driving more contactless payment usage in-store during the pandemic for reasons related to social distancing, as opposed to merchants,” Peterson says. . . .

– By Kristian Soltes. For questions about this newsletter or its content, contact ksoltes@constantinecannon.com.