1 July 2015 ANNOUNCEMENT PAY.ON and First Annapolis collaborate to publish white paper: To download your free copy, visi...
July 2015 ANNOUNCEMENT PAY.ON and First Annapolis collaborate to publish white paper:
A Conversation with Alex Aguila, Sr. Director of Credit & Financial Services at Sam’s Club
We recently sat down with Alex Aguila, Sr. Director of Credit & Financial Services at Sam’s Club. In this Q&A format we discussed Sam’s Club’s recently launched Business Lending Center initiative. Alex Aguila is the Sr. Director of Credit & Financial Services for Sam’s Club and project lead for the Spring 2015 rollout of the Sam’s Club Business Lending Center, which provides businesses with an easy-to-use financing solution to their working capital needs. Alex leads the development of financial... More
What to Expect from a Newly Independent PayPal
On July 20th, PayPal and eBay officially separated, a result of shareholder activism, PayPal’s robust growth, a hot IPO market, and enthusiasm over the prospects for mobile payments. PayPal’s market cap... More To download your free copy, visit http://technology.payon.com/ whitepaper-open-payments/
Start-Up Spotlight: Insikt
This is the second in a series of periodic spotlight pieces on new or innovative companies in the payments space. We recently spoke with James Gutierrez, founder & CEO of Insikt, a white label loan origination and... More
Tracking Mobile Payments: Wallet Comparison in the U.S.
Activity in the mobile payments space continues to accelerate. Almost every major player in the market has made a move since the launch of Apple Pay... More renewed its private label and co-branded credit card agreement with
The Purchasing Card Rebate Conundrum – Basis Points or Dollars? Is your organization prepared for an upcoming new era in B2B payments and rebates?
We are rapidly reaching a point of inflection in the U.S. purchasing card market. As shown in the chart... More June 18, 2015 The undersigned served as strategic advisors to Chevron U.S.A.
Consulting M&A Advisory Services
COUNTDOWN EMV Liability Shift
days to go.
Card-present counterfeit fraud liability shifts to the least compliant party.
LEARN MORE (62 days to go, as of July 31, 2015) July 2015 Navigator
Impact of Scale on Cost and Margin in the U.S. Merchant Acquiring Industry
As competition in acquiring increases, cost is one variable over which acquirers have some measure of control. Conventional wisdom is that acquirers benefit from scale economies. We have found that... More
A Quick Look at Recent Changes in Gas Cards
Over the span of a few months, both BP and Chevron recently announced enhancements to the value propositions on their gas cards. Synchrony Financial manages both programs, and the timing of the... More
The Changing Distribution Landscape for Acquiring in the U.K.
Distribution of payment acceptance services in the U.K. market is becoming significantly more crowded, and intermediaries are playing an increasingly important role. This trend follows the evolution of the... More
The Market for Real-Time Payments in the U.S. Remains Fragmented and Uncertain
Real-time payments have become a focal point as the Fed, NACHA, and multiple private sector ventures attempt to address a variety of real and perceived gaps in the U.S. payments market. Multiple... More 1 of 11
© 2015 First Annapolis Consulting, Inc.
A Conversation with Alex Aguila, Sr. Director of Credit & Financial Services at Sam’s Club We recently sat down with Alex Aguila, Sr. Director of Credit & Financial Services at Sam’s Club. In this Q&A format we discussed Sam’s Club’s recently launched Business Lending Center initiative.
• Lending Club provides members with access to term loans of up to $300,000 with great rates and affordable fixed monthly payments. • SmartBiz connects members to vetted 7A SBA loans from $5,000 - $350,000 with low monthly payments, competitive rates and a streamlined process.
Alex Aguila is the Sr. Director of Credit & Financial Services for Sam’s Club and project lead for the Spring 2015 rollout of the Sam’s Club Business Lending Center, which provides businesses with an easy-to-use financing solution to their working capital needs. Alex leads the development of financial services strategy for Sam’s Club Business and Savings member, including the award-winning 5-3-1 Sam’s Club MasterCard credit program. Prior to joining Sam’s Club, a division of Walmart, Alex accumulated over 25 years of experience in driving business growth through consumer and business services, loyalty marketing and product development at the likes of Citigroup, Home Depot, GE Capital, and American Express. 1. Would you provide some context on the impetus for Sam’s Club’s recent introductions of the SmartBiz and Lending Club partnerships? Based on member feedback, Sam’s Club is investing in a comprehensive portfolio of business benefits – the most robust of any retailer – that extends the value of membership and allows Sam’s Club to work harder for small business owners. Part of our model as a warehouse club is to do the homework for our members and present them with a highly relevant selection of products in each category. In building our portfolio of business services, we choose the best partners in their respective industries to bring best-in-class products to our members. That means members save time and money by having access to these services in one convenient location – Sam’s Club. Based on conversations and research, Sam’s Club business members cite access to capital as the essential foundation to grow their businesses. Our members are America’s restaurant owners, resellers, care organizations and small office proprietors, and they need affordable access to capital at fair and transparent terms. As the Sam’s Club/Gallup Microbusiness Tracker told us last year, 65 percent of these business owners used personal finances to start their businesses. They need more resources to launch, run and grow their businesses.
With the Business Lending Center’s needs-assessment wizard, members answer four simple questions to determine the right type of loan – and lender – to meet their needs and help them grow. 2. How do these products complement your existing private label and co-branded credit cards? The Lending Club and SmartBiz products are intended to complement the Sam’s Club credit cards by addressing larger, less frequent borrowing requirements at lower rates over longer terms. For members interested in increasing cash flow, the Business Lending Center connects them to our award-winning Sam’s Club Business MasterCard with credit extended by Synchrony Bank. Business members using our MasterCard program earn up to 5% cash back on gas, dining, travel and all purchases anywhere MasterCard is accepted. 3. What role do financial services play in your member loyalty strategy? Through an industry-leading financial services program and low prices on products and critical business services, Sam’s Club is in effect providing a “business in a box” solution – an online platform to help businesses grow by reducing the operational hassles small business owners so frequently encounter. For 30 years we’ve helped members run their businesses. With a robust financial services strategy, now we’re helping members GROW their businesses, which creates jobs, strengthens local communities and reinforces the value that the Sam’s Club membership delivers. 4. Can you envision Sam’s Club filling a financial services role for small businesses that is as important as the role Walmart plays for its customers? Walmart’s founder Sam Walton created Sam’s Club in 1983 to provide savings and solutions to America’s small business owners, similar to Walmart’s heritage of helping customers and communities save money and live better. For years, Sam’s Club has provided responsible credit programs and listened to our members to provide the right solutions for their needs. Just as the Walmart MoneyCenter® is tailored to meet the needs of Walmart’s customers, the Sam’s Club Business Lending Center responds to what our members want, using a simple, fast platform enabled by technology to take the hassle out of accessing capital. As the club for the small business community, we are always looking for new ways to extend the value of membership to small business owners and will continue to explore means to save them time and money through great merchandise, key services, innovation and technology.
This unmet need among our business members was a call to action for us to align with industry leaders to launch the Sam’s Club Business Lending Center, which is a fast, simple online platform connecting our members with responsible lenders and offering savings of 20 percent on loan fees.
What to Expect from a Newly Independent PayPal By Jeff Crawford and Laura Levy On July 20th, PayPal and eBay officially separated, a result of shareholder activism, PayPal’s robust growth, a hot IPO market, and enthusiasm over the prospects for mobile payments. PayPal’s market cap reached a high of $52 billion on the day of the split. Prior to the separation, PayPal made several strategic acquisitions positioning it for further growth. In April, PayPal acquired Paydiant, adding white label mobile wallet development and ecommerce security capabilities. On July 1st, it acquired Xoom, an international remittance company using online and July 2015 Navigator
mobile platforms. The addition of Xoom’s technology will allow PayPal to play a larger role in the global P2P marketplace. With Xoom’s presence in 37 countries, PayPal will be able to better tap into emerging economies, most notably India, China, Brazil, Mexico, and the Philippines. Both acquisitions support PayPal’s long-term merchant and consumer expansion goals. PayPal is working to increase merchant acceptance, both online and at the point of sale. According to PayPal’s Chief Product Officer, Hill Ferguson, the Paydiant acquisition allows PayPal to give merchants “the right tools to integrate payment experiences into their environment.” PayPal Here—its mPOS product that competes with Square and Clover and
2 of 11
© 2015 First Annapolis Consulting, Inc.
now supports NFC payments—is aimed at increasing the number of small merchants using the PayPal platform. As more merchants accept PayPal, the company expects to see consumers use PayPal more frequently—two to three times a week instead of one to two times a month. To encourage consumers to use PayPal regularly, the company will build on wallet and P2P capabilities and scale to make—in Ferguson’s words—“…the most open digital wallet on the market.” In the short term PayPal will likely pursue several strategic initiatives: • More Acquisitions: As indicated by CEO Dan Schulman, “The balance sheet affords [PayPal] the opportunity to look opportunistically where it makes sense to acquire.” (Recent financial statements show PayPal to have about $6 billion in cash, prior to its $890 million Xoom acquisition). • Expanded Digital Payments Activities: We expect to see PayPal continue to make an aggressive push into mobile payments, perhaps enhancing the speed and security of its Express Checkout by offering biometric authentication similar to Apple Pay. • New Products and Services: PayPal may capitalize on its reputation as a secure and safe payments provider and work to “tokenize” its existing payment gateway service for merchants.
• Partnerships and New Business Models: PayPal may become a provider of white label digital payment services for merchants and issuers alike, e.g., building the CurrentC wallet for MCX. This approach would clearly differentiate its offering from branded products such as Apple Pay and Samsung Pay. These activities appear to be a natural strategy given the company’s new independence, robust balance sheet, and the added capabilities from its recent acquisitions. Incumbent providers of digital payment services should expect increased competitive pressure from PayPal in the coming months. Source: FierceFinanceIT, “Weeks Ahead of Independence, Paypal’s Acquisition of Xoom Hints at Future Strategy,” 07/7/2015; Hill Ferguson, “Why PayPal Is Buying Mobile-Payment Startup Paydiant, Bloomberg (youtube.com); PayPal, San Francisco Chronicle, “EBay, PayPal Outline Plans for After Split,” 07/16/2015 (updated 07/20/2015); Siliconbeat, “PayPal Shares Soar After eBay Split,” 07/20/2015.
For more information, please contact Jeff Crawford, Manager, [email protected]
; or Laura Levy, Analyst, [email protected]
Both specialize in Debit and Prepaid.
Start-Up Spotlight: Insikt 2. What unique capabilities does Insikt bring to lending partnerships?
By Ben Brown This is the second in a series of periodic spotlight pieces on new or innovative companies in the payments space.
Number one, we are able to serve the full market, including a consumer segment that is very hard for others to approve: people who don’t have a lot of credit history and those with a low FICO score. These are everyday Americans who are working hard, but unfortunately don’t have great access to credit. We are able to offer these hard working folks an affordable product that our partners can feel good about – and which is also in line with the new, proposed rules on lending.
We recently spoke with James Gutierrez, founder & CEO of Insikt, a white label loan origination and investing platform based in San Francisco. Insikt enables its partners – retailers, manufacturers, or even financial institutions – to offer loans under their own brand using Insikt’s endto-end platform. Insikt also operates its own private debt marketplace to enable accredited investors to fund these loans. We spoke with James about his vision behind creating Insikt as well as some tips for entrepreneurs and investors in the alternative lending space.
Number two, we are entirely white label and flexible. We want to empower our partners to be the winning brand with their customers, so we have built everything in a way that makes the consumer feel like they are getting an offer of credit from our partner. We also built our entire platform in the last two years, so we don’t have any legacy issues or systems problems. We can build any customer experience our partners want, launch programs quickly, then test and rework products in very fast cycles.
1. What market trends did you see that created a need for Insikt? I previously founded and led the soon-to-be-public Oportun, formerly known as Progreso Financiero, a lender focused on folks in the Hispanic market who didn’t have any credit history. When new regulations came out after the financial crisis, I thought, “this problem of access to capital is going to get worse, not only for Latino families but for everyone.” Banks will not be able to take on as much risk in lending irrespective of profitability or need. As a result, we think that major brands and large companies are going to want to take lending into their own hands, especially for non-prime customers, but without the headache of building costly infrastructure, which is what we provide on a “lending-as-aservice” basis. We also think a new class of investors, who are dying for short term yield, will want to invest in these assets but in a way where we both take risk of loss so that our interests are aligned. So, we securitize all of the loans on our own marketplace to fund them with a broad diverse group of accredited investors – high net worth individuals, family offices, and institutions. July 2015 Navigator
Number three, our Lendify platform is multi-channel. We can enable lending via the web/mobile or in brick-and-mortar locations, which is our initial focus. If you operate a brick-and-mortar location and you want to offer loans or finance purchases in a way that brings the best of digital to retail, we can do that. Having built and operated over 100 loan stores at Oportun, we have a lot of experience in designing the right in-store customer experience for personal lending or retail credit. 3. You have found success lending to non-prime consumers, which many financial institutions have found challenging to serve. What best practices have you observed serving this segment?
3 of 11
At Oportun, where we consistently had low loss rates including during the crisis, we found that some parts of the non-prime segment could actually handle a shock a little better than the prime segment. This might seem counter-intuitive, but what we found was that non-prime borrowers are used to adversity, so when times got really tough, it was not that much of a change for them and they could cope. Prime borrowers may have had © 2015 First Annapolis Consulting, Inc.
more importantly, respect for what could go wrong. I spent many years recruiting Nigel Morris to my board at Oportun and I always remember his early advice: “James, credit is like poison. It will bite you and you need to respect it”. The other key to lending today is to focus on big markets where you don’t have tremendous price competition and where you can price for risk (particularly in a stressed environment); you don’t want to attract borrowers who only care about price. The next correction could knock out a lot of players who are either priced too low or have not made great credit decisions. Founders and investors should focus on building and backing teams that have proven track records with underwriting loans in good times and bad times.
lower absolute loss rates going into the crisis, but the increase in loss rates in that segment after the crisis was tremendous. It is also important to innovate around how you are using data to make decisions. In our new model, here at Insikt, we allow our partners to provide any data on their customers that might help us make better decisions. Across the thousands of applications that we have processed on our system so far, we have found that there is a material difference in credit performance depending on what data we are able to get from our partners. 4. As a repeat financial services entrepreneur, what advice do you have for other founders or for private equity funds looking at fintech investments? For founders, fight the pressure to measure yourself based on volume. Credit quality is what matters, and it takes time to get the seasoning you need to measure quality. The regulatory shock to the banking system is not going away, so play the long game, and focus on building a business that can get through the next credit cycle. For investors, this is a great time to be investing in lending businesses, but many new lenders out there lack deep credit experience and,
Finally, there will be a capital flight if there is a crisis. We are controlling for that by having diverse sources of funding directly from thousands of investors through our online securitization model so we can originate loans in both good times and bad times. This also aligns our interests with our investors and keeps loans on balance sheet, which we think is part of the solution to stable funding. For more information, please contact Ben Brown, Senior Consultant, [email protected]
, specializing in Credit Card Issuing and Payments Innovation.
Tracking Mobile Payments: Wallet Comparison in the U.S. Activity in the mobile payments space continues to accelerate. Almost every major player in the market has made a move since the launch of Apple Pay 9/2014: eBay decided to spin off PayPal in 2015. Former Amex executive Dan Schulman joined PayPal as the company’s new CEO and, a few months later, PayPal acquired Paydiant (a key vendor to MCX) to bolster its capabilities and relationships with large retailers. 2/2015: U.S. MNOs sold their Softcard wallet joint venture to Google and agreed to support Google’s payments offerings. 3/2015: Samsung, the #1 Android OEM, committed to launch Samsung Pay and purchased LoopPay for its unique magnetic transmission technology.
Apple Pay Technology Requirements
iPhone 6/6+ iPhone 5s with Watch
5/2015: Visa finalized its Visa Digital Enablement Program (VDEP), an infrastructure framework for mobile payments services. MasterCard is expected to finalize its similar MDES program soon. 5/2015: Google announced Android Pay, a payment service based on VDEP/MDES (network tokenization) and deeply integrated with the Android mobile OS, similar to Apple Pay. 6/2015: Apple announced that Passbook will be renamed Wallet, and store credit and loyalty cards will be supported in an update to Apple Pay this year. JCPenney, Kohl’s, and BJ’s committed to accept Apple Pay as a result.
Android Pay Android 4.4+ devices with NFC radio
CurrentC Any iOS or Android device
POS Interface Sign-Up Experience Credential Storage Security Measures Data Privacy July 2015 Navigator
Push from iTunes Photo scan or type-in Token Only Network tokenization Biometric ID No Tracking
Push from bank app Type-in Cloud Based Network tokenization Biometric ID Google Tracking 4 of 11
Samsung Pay Samsung Galaxy S6 and S6 Edge
MST TBD Cloud Based TBD
(likely dynamic barcodes)
Photo scan or type-in Token Only Network tokenization Biometric ID TBD © 2015 First Annapolis Consulting, Inc.
GPCC Debit PLCC
GPCC Debit PLCC
Samsung Pay GPCC PLCC
Channels Status Fees
Point of Sale
(PLCC/ loyalty pending)
(15 bps credit, $0.05 debit)
Point of Sale
Point of Sale
Point of Sale
Launching 3Q 2015
Launching late 2015
Launching Sept. 2015
Source: Company websites, public announcements, and First Annapolis Consulting research.
For more information, please contact: John Grund, Partner, [email protected]
Josh Gilbert, Partner, [email protected]
Lee Manfred, Partner, [email protected]
Hugh Gallagher, Principal, [email protected]
The Purchasing Card Rebate Conundrum – Basis Points or Dollars? By Frank Martien
Figure 1: Purchasing Card Spend in U.S. ($B)
Is your organization prepared for an upcoming new era in B2B payments and rebates? We are rapidly reaching a point of inflection in the U.S. purchasing card market. As shown in the chart below, by 2021, First Annapolis projects that Vcard1 spend will nearly be at parity with more traditional walking plastic Pcard spend; and, by 2024, Vcards will well surpass Pcards. While Pcards will remain relevant for most organizations desiring a walking plastic mode of payment for typical indirect spend categories such as office suppliers and catering, the real growth story in purchasing cards relates to Vcards where 20-30% annual growth rates in spend are projected for the foreseeable future. Plenty of runway exists as, even the $1 trillion in projected spend in 2024 would only comprise less than 5% of First Annapolis estimates for potential addressable dollar spend for U.S. mid market and large corporate organizations in the private and public sectors. Most of the potential growth drivers around Vcard spend adoption, such as potential to move paper checks to a centralized, controlled, preapproved, and invoice work flow integrated form of payment are quite well documented by the NAPCP and many other advocacy organizations and sources. Just to add to this running list, First Annapolis sees a significant potential forthcoming driver related to travel spend. For a quick background, the European Council based in Brussels adopted a regulation capping interchange fees for payments made with debit and credit July 2015 Navigator
Source: First Annapolis Consulting forecast informed by industry statistics and primary research of end user organizations and B2B providers.
5 of 11
© 2015 First Annapolis Consulting, Inc.
cards on April 20, 2015. Among many provisions, commencing December 9, 2015, this regulation will reduce credit card interchange rates to 0.30% of the transaction amount. Commercial cards are exempt from this interchange regulation, but only if “charged directly to the account of the undertaking or public sector entity,”2 which has been interpreted by many European commercial card providers as requiring client programs to be centrally billed to qualify for regulation exemption. Meanwhile, many European organizations approached by their providers to consider migration to centrally billed programs have opted instead to stick with their current individual liability, individually billed plastic programs. Consequently, First Annapolis projects that European commercial card providers will seek to divert as much travel spend as possible away from individual plastics and towards centrally billed accounts. We believe this could lead to aggressive use of traditional central travel accounts as well as introduction or expansion of invoice-based billing of certain categories of travel expenditure, which would occur in the Post-Trip process and for which many individual traveller charges could potentially be packaged, subsequent to expense report approval, into large payments by organizations back to the travel providers via accounts payable (“AP”) and Vcards. Should this phenomenon, driven potentially by providers to preserve interchange economics, become common for organizations in Europe, we could see this practice spread to North America beginning with multinational organizations. For many organizations, this could be a triggering event to embed Vcards into AP for travel but then radiate Vcard usage out to many other spend verticals. We would further note that Vcard use for travel-related expenditures is already common in support of online travel booking providers; so this European-led adoption would actually be an expansion rather than an entry of Vcards into travel spend.3 In this new world of B2B payments in which Vcard growth will result in Vcards comprising the majority of many end-users’ commercial card programs, we may also enter a new era of rebates. Historically, many end-users have focused on basis points as the hallmark currency of quotation for rebates (e.g., an end-user receiving rebates equal to 80 cents for every $100 of card spend
would say they receive “80 basis points” from their provider). In the new era, Vcards will play a much more prominent role by delivering superior enterprise resource planning (“ERP”) and AP integration, functionality, controls, and reporting. Meanwhile, the expansion of lower large ticket interchange rates to encourage supplier acceptance and improvements in automating acceptance of cards and payment application to invoices in accounts receivable (“AR”) systems for suppliers will promote the demand-pull component of Vcard growth. With end-user programs migrating towards larger ticket, enterprise spend transactions, we foresee rebate basis points declining significantly but rebate dollars growing as the portion of an end-users’ direct and indirect spend on cards increases exponentially. First Annapolis thereby projects that before or as we reach the tipping point of Vcard spend surpassing Pcard spend, end-users will start to refocus on maximizing rebate dollars rather than rebate basis points. To be clear, end-users, in this new world, will continue to negotiate aggressively with their providers for the best deal they can secure. However, the reign of rebate basis points could wane as more sophisticated end-users selected providers that will help them most effectively radiate spend and grow their commercial card programs, including through introduction and expansion of Vcards. Through such growth, end-users will not only increase rebate dollars while eliminating bank fees associated with checks, ACH, and wires, but they will also achieve the true value promise of purchasing cards through process savings and superior access to spend data through which to manage their supplier relationships in a coherent manner across spend verticals. 1
The term “vcards” is synonymous with virtual cards, virtual accounts, epayables, EAP, and other commonly used industry terms for non-plastic purchasing cards accounts often integrated with accounts payable and/or ERP systems.
Quotation from “Regulation Of The European Parliament And Of The Council On Interchange Fees For Card-Based Payment Transactions,” Brussels, 20 March 2015.
“Payment Provider WEX Finding Virtual-Card Niche With TMCs,” Business Travel News, November 6, 2014.
For more information, please contact Frank Martien, Partner, [email protected]
, specializing in Commercial Payments and Bankcard Issuing.
Impact of Scale on Cost and Margin in the U.S. Merchant Acquiring Industry By Brooke Ybarra As competition in acquiring increases, cost is one variable over which acquirers have some measure of control. Conventional wisdom is that acquirers benefit from scale economies. We have found that premise to be true, to a point, but cost alone does not explain or predict an acquirer’s success. Moreover, scaled acquirers may be approaching an end-game on scale efficiency, suggesting the largest players will need to find variable cost reductions or employ differentiated strategies (or both) in the face of increasing competition.
Figure 1: Relationship Between Expense and Profitability (benchmarks from 2009 – 2015)
Managing to a low cost structure is not the definitive element in competition in acquiring, but it is true that acquirers generating higher profit margins tend to have lower expenses on a per transaction basis (see Figure 1). Although the highest profit margins are frequently associated with low cost players, high cost acquirers have also been able to generate attractive profitability. Our analysis indicates there is a correlation between cost per transaction and scale (see Figure 2). Among our sample, the range between the lowest and highest cost provider decreases as scale increases, suggesting there are fewer outliers among larger acquirers, July 2015 Navigator
Source: Acquirer financial statements, First Annapolis Consulting research and analysis.
6 of 11
© 2015 First Annapolis Consulting, Inc.
and the simple average expense per transaction is higher for small acquirers than large acquirers.
Figure 2: Relationship Between Expense and Scale (benchmarks from 2009 – 2015)
The nature of expense in acquiring (whether fixed or variable) varies based on certain business decisions the acquirer makes. For example, an acquirer that has transaction processing platforms and technology in-house incurs expense through a series of technology investments and recurring maintenance costs that are largely fixed, whereas an acquirer that contracts with a third-party processor for transaction processing likely has more variable technology expenses. It tends to be the largest acquirers that can support the large one-time investments required to in-source processing, and the ability to spread these fixed costs over a large base of transactions contributes to the scale economies shown in Figure 2. Expenses associated with sales, boarding, customer service, and back-office functions tend to be driven by headcount and are variable costs. However, there are capacity considerations inherent to these functions that benefit scaled players as well. There is a wide range of expense structures among smaller acquirers, likely reflecting the various operating models employed by ISOs. Most ISOs with less than $20 billion in annual bankcard volume outsource processing, but their models vary in terms of what other functions they rely on their processors to perform (e.g., underwriting and customer service). In addition, they vary in their lead-generation practices, and some incur incremental variable costs from referral sources in addition to traditional sales expenses.
Source: Acquirer financial statements, First Annapolis Consulting research and analysis.
Figure 3: Relationship Between Expense and Scale Changes
Increases in scale at a given acquirer tend to benefit that acquirer from a cost perspective. Though there are exceptions, as shown in Figure 3, most acquirers experience a decrease in expense per transaction as they increase scale. The decrease in expense per transaction is more pronounced for smaller acquirers than for larger acquirers suggesting there may be a floor for fixed expense per transaction. This analysis confirms that there are advantages for acquirers to manage to a low cost structure. One way to achieve a low cost structure is to gain efficiencies from scale. This method is more effective for smaller acquirers, as there appears to be floor to the cost structure gains an acquirer can experience through scale. When that limit is reached, acquirers will need to seek other cost efficiencies, such as lower variable costs, in order to further reduce their expense per transaction. For more information, please contact Brooke Ybarra, Manager, [email protected]
, specializing in Merchant Acquiring. Source: Acquirer financial statements, First Annapolis Consulting research and analysis.
A Quick Look at Recent Changes in Gas Cards By John Grund and Ryan Douglas Over the span of only a few months, both BP and Chevron recently announced enhancements to the value propositions on their gas cards. Synchrony Financial manages both programs, and the timing of the card enhancements coincided with a contractual renewal in the case of Chevron, and a new partnership with BP following the transition of the program from Chase. Both announcements come in the wake of a significant drop in the price of gas at the beginning of the year, which directly impacts the relative value of the rewards program for gas cards. For context, the average price of gas (dollars per gallon) was $2.55 for the period between January and June July 2015 Navigator
of 2015 ($2.88 in June) compared to an average of $3.61 for the same period in 2014.1 At the same time, almost all general purpose card issuers have continued to feature gas-based incentives (e.g., earn increased rewards for gas, grocery, etc.) to attract new cardholders with point or cash back based rewards on everyday spend. Select retailers who have their own branded petroleum stations, such as Sam’s Club, are also incorporating gas rewards in their proprietary credit card programs (e.g., Sam’s Club MasterCard offers 5% cash back on gas purchases). At the end of July, Gulf Oil also made a change to its card program, entering into a new partnership with First Bankcard to issue its co-brand credit card (now Visa), formerly issued by
7 of 11
© 2015 First Annapolis Consulting, Inc.
Barclaycard (MasterCard); however, the value proposition remained largely the same (note: Gulf also has a PLCC product which it issues in-house). Figure 1 level sets the card offerings of BP and Chevron and the nature of the changes, but our summary observations are as follows: • Substantial increase to ongoing earn rates – both BP and Chevron made significant increases to the value of the ongoing rewards/discounts offered on both the PLCC and co-brand cards; the BP offer of 10 cents off on PLCC and up to 25 cents off on co-brand are among the highest discounts offered in the market today on oil cards (max redemption of 20 gallons); • Cents off discounts are table stakes – the new credit cards offer cents off fuel discounts as the reward currency (for both the acquisition bonus and ongoing reward), as do most oil cards in the market today; in years past, there were various rewards types on oil cards , e.g., percent cash back, points programs, gift cards; • Reinstatement of rich acquisition bonuses – Chevron not only increased its acquisition bonus from 10 cents off to 30 cents off for 60 days, but it is also extending this bonus to co-brand cards (whereas previously the bonus only applied to PLCC); • Encouragement of non-gas purchases – the Chevron co-brand card is
unique in that it offers fuel discounts up to 20 cents off per gallon, but only if non-fuel (outside) spend on the card is over $1,000 per month (non-fuel spend over $300 earns 10 cents off); and • Differing redemption forms – BP gives cardholders the choice to redeem discounts either as an instant POS fuel price reduction (i.e., “roll back”), or as a statement credit; at this time, Chevron only offers a statement credit, which occurs automatically at the end of each billing cycle. In addition to credit card programs, oil companies have launched or participated in numerous tender-neutral reward programs (both standalone and coalition programs) that reward customers with gas savings opportunities (e.g., BP Driver Rewards, grocery reward partnerships, Shell’s Fuel Rewards Network, Plenti) in an effort increase loyalty and spend at their stations. For oil card programs, competitive substitutes are abundant, putting pressure on gas companies and their partners to offer rich rewards and develop creative ways to increase market share. 1
U.S. Energy Information Administration.
For more information, please contact John Grund, Partner, [email protected]
; or Ryan Douglas, Senior Consultant, [email protected]
Both specialize in Credit Card Issuing.
Figure 1: Summary of Gas Program Reward Changes
For every $100 spent. 2 Reward applicable gallons per coupon/reward redemption. 3 Rebate applied to current billing cycle. 4 POS discount is not redeemable at BP branded locations in Alabama. Source: Current company websites, historical versions of company websites, old take-one applications from 2011 and 2012.
July 2015 Navigator
8 of 11
© 2015 First Annapolis Consulting, Inc.
The Changing Distribution Landscape for Acquiring in the U.K. acquirers – primarily front-end technology solutions that interface with merchant technical environments and capture payments.
By Yuriy Kostenko Distribution of payment acceptance services in the U.K. market is becoming significantly more crowded, and intermediaries are playing an increasingly important role. This trend follows the evolution of the U.S. market over the past decade, in which independent software vendors (ISVs, which come in various flavors) became the central channel for distribution for highgrowth acquirers such as Mercury and Accelerated Payment Technologies (subsequently acquired by Vantiv and Global Payments, respectively). We see this trend now accelerating in the U.K., and we believe that successfully embracing and mastering partner distribution (ISVs in particular) will be the single greatest factor for success for U.K. payment service providers (PSPs) and acquirers. Fifteen years ago, banks were the central point for distributing acquiring and payment terminals in the U.K. Today, there are hundreds of parties directing or influencing the sale of payment services in this market. This shift is still in early stages, however, and partner distribution remains relatively informal, with no one U.K. competitor having cornered the market. Distribution of payment services in the U.K. is becoming increasing complex, with three general classes of distributors for acquiring services: acquirers & ISOs, PSPs, and ISVs as well as others, for which payments are not a core service, but rather a complementary service typically within a broader software-based offering (see Figure 1). This migration to a broader and more disintermediated payment acceptance distribution landscape is a function of three evolutionary waves: 1. Banks’ ineffective outbound sales. ISOs first arose in the U.K. market more than 15 years ago on the basis of outselling the banks, which utilized an almost entirely passive approach. 2. E-commerce product gaps. With the onset of e-commerce in the late 1990s/early 2000s, PSPs evolved to fill product gaps left open by
3. Integration of payments into other software and services. Payment products have become increasingly integrated into other solutions such as ePOS systems and e-commerce platforms. For these platform providers/ISVs, integrated payment services both strengthen their core product (no double entry, better data reconciliation, etc.) and help generate incremental revenue. Today, ISOs, in the purest sense, are proliferating not as often as they did 5-10 years ago. Many of the original ISOs (CardSave, CPS) have already been acquired. Most ISOs that are thriving today (e.g., PaymentSense) have embraced the latter two trends, adding PSP capabilities and working with channel partners. Historically allies to acquirers, PSPs now also often compete aggressively as “collectors” or acquirers. Out of 60+ PSPs in the U.K. market, approximately 50% (representing ~80% of turnover) offer a merchant account. POS PSPs / terminal OEMs have tended to remain more acquiring-agnostic, but we also see this breaking down in time. The shift towards distribution partners (ISVs, in particular) is broad and nuanced. There are many types of distribution partners, which can be separated into those that technically integrate payments into other services and those that simply refer merchants to providers of payment services. Those that technically integrate payments are the more sizable and influential, as these providers (e.g., Cybertill, ePOS Now, etc.) create meaningful value for merchants and fundamentally shift payment services from being a standalone service to being a component of a broader bundle. Recent research conducted by First Annapolis suggests that the ISV/VAR/ platform partner channel is not yet highly penetrated and certainly not yet mastered. Our research shows that about 65% of these providers (ePOS, ISVs, VARs and platform providers) are actively selling payment services via their website. The penetration is much higher if you include payments
Figure 1: U.K. Acquiring Distribution Landscape
Banks, Acquirers, and ISOs
ISVs, VARs, and Others
POS OEMs & PSPs
ePOS ISVs & VARs
Tablet POS ISVs
e/m-Commerce Platforms & Carts Business Management Software Trade Associations
Source: First Annapolis Consulting market observations.
July 2015 Navigator
9 of 11
© 2015 First Annapolis Consulting, Inc.
referrals that are not actively marketed (but rather loosely referred). The fact remains, however, that the channel is not fully penetrated (see Figure 2).
Figure 2: Payment Acceptance Offering: Selected Key Distribution Channels
Currently, many payment partnerships are non-exclusive, where the approach seems to be to partner with as many providers of payment services as possible. Our research suggests that there is not a high-level of satisfaction among ISVs that partner with providers of payment services, where we do not expect this current state to remain. As observed in the U.S., we anticipate deeper penetration of ISVs with more strategic partnerships. Within this evolving marketplace, it is critical for PSPs and acquirers to have a well-crafted channel strategy, which balances the benefits of partnership with the longterm risk of disintermediation. The most sophisticated distribution partners (e.g., Shopify, Intuit, etc.), fully brand the solution as their own and control the relationship and rights to the merchant.
Note: * Trade associations in service and/or retail industries only. Sources: First Annapolis Consulting market observations.
The distribution of payment acceptance services in the U.K. is evolving along a path similar to what we have seen in the U.S. market. Distribution partners, especially those which technically integrate and improve upon the stand-alone payment services, are steadily winning distribution market share. This creates a great opportunity for those providers that can master these distribution channels and lock-in long-term strategic
partnerships. For those providers that ignore this trend or are ineffective at adapting to partnership models, the possibilities for ongoing market share wins will become more challenging. For more information, please contact Yuriy Kostenko, Senior Consultant, [email protected]
, specializing in Merchant Acquiring.
The Market for Real-Time Payments in the U.S. Remains Fragmented and Uncertain By Stephen Kiene
organized two standing task forces, and recently appointed an experienced Fed executive to the new position of Payments Strategy Director.
Real-time payments have become a focal point as the Fed, NACHA, and multiple private sector ventures attempt to address a variety of real and Much of the focus has been on a real-time payment infrastructure that is perceived gaps in the U.S. payments market. Multiple potential use cases have faster, safer, and lower cost than existing card and ACH systems. The “creditgiven rise to a variety of business models, with no clear winner(s) at this time. push” transactions would originate from the payer’s bank (as opposed to However, many of these use cases represent opportunities to dramatically the recipient’s bank, as card transactions do today) and would be settled in alter how consumers and businesses conduct payment transactions. minutes or seconds, rather than days. There is not yet consensus, however, Card-issuing banks and other payment providers should closely monitor around how this infrastructure should be designed and implemented, largely developments in this space to understand when and how Figure 1: Next-Generation Payment Platforms and Real-Time Payment Providers in the U.S. they should support these new solutions, how the Fed views its role in designing and implementing a top-down solution, and what actions may be necessary to mitigate the disruptive impact of this activity on current payment products. The U.S. Federal Reserve stated its desire to improve the country’s electronic payment systems and outlined a series of perceived gaps vis à vis other international markets. The agency is pursuing five broad goals: Speed, Security, Efficiency, International, and Collaboration. Since 2013, the Fed has released two policy papers related to this effort,
Note: *Dwolla has expanded its offering to include real-time DDA transfers to accounts at participating financial institutions. Source: Company statements and press releases; First Annapolis Consulting industry analysis. July 2015 Navigator
10 of 11
© 2015 First Annapolis Consulting, Inc.
due to the significant investment required. Absent a unified industry solution, several private-sector parties are taking a go-it-alone approach. Some of the providers are partially motivated by the desire to avoid a government-mandated solution that could be even more disruptive to the current system. These parties —including FI industry consortia, payment processors and networks, and non-traditional technology competitors (see Figure 1) — are developing and launching advanced payment platforms and real-time payments initiatives to achieve disparate objectives and address specific (sometimes narrow) use cases. Potential applications for credit-push transactions focus primarily on B2B, but also include C2B, A2A, and P2P, each with unique demand and functional attributes. The U.S. market for next-generation payments remains highly fragmented: no provider has yet consolidated a meaningful position, and no clear and coherent business model has emerged as a distinct winner. Some of these providers are developing truly innovative real-time payment services, while others are developing registry/directory services on top of existing infrastructure. Some smaller, proprietary solutions have been faster in getting to market, while the larger initiatives led by major processors and consortia must move more slowly. These larger initiatives, however, may be best positioned for long-term success due to their scale and strong backing from industry stakeholders. While real-time payments are still nascent, significant investment by so many parties suggests there is long-term strategic value in these services and virtually guarantees that one or more viable solutions will emerge. Real-
time payments could meaningfully lower costs and increase efficiency, but could also disrupt existing payment-card economics, particularly if migrated to the POS environment. Card-issuing FIs, in particular, should closely monitor developments in this space, with a focus on three key areas. •
Understanding: FIs should continue to monitor the Fed’s developing industry roadmap to understand the potential implications of a government-mandated solution, as well as the value of different private sector business models.
Partnership: FIs will be key partners for many of these services, providing account connectivity and marketing support for large-scale initiatives.
Response: FIs should consider how they can take action to protect and grow revenue by listening to customers and working with partners and vendors to understand the business case and financial opportunity of these new services.
As private-sector services continue to progress and the dual task forces empanelled by the Federal Reserve issue their final recommendations, U.S. banks that rely heavily on payments revenue should be prepared to take quick action to address these changes in the payments market. For more information, please contact Stephen Kiene, Senior Consultant, [email protected]
, specializing in Debit and Prepaid.
For the latest news and articles, follow First Annapolis on LinkedIn & Twitter
Founded in 1991, First Annapolis is a specialized advisory firm focused on electronic payments. Our market coverage is international in scope with a primary focus on North America, Latin America, and Europe. In total, we have over 70 professionals across our practice areas giving us one of the largest and strongest advisory teams focused exclusively on electronic payments. Practice Areas
Credit Card Issuing Debit & Prepaid Merchant Acquiring Retailer Services Mobile / Alternative Payments Commercial Payments
Management Consulting Partnership Finance Strategic Sourcing Portfolio Management Strategy Development / Implementation Rewards Program Support
Three Park Place, Suite 200 Annapolis, Maryland 21401, USA www.firstannapolis.com
July 2015 Navigator
M&A Advisory Services End-to-End Transaction Support Valuations Fairness Opinions Diligence / Negotiation Support U.S. Office +1 (410) 855 8500 Europe Office +31 (0) 20 530 0360 [email protected]
11 of 11
© 2015 First Annapolis Consulting, Inc.