Preparing Cards for the Next Era in Payments


credit-card-9-3-19.pngAdvancements in payments technologies have forever changed consumer expectations. More than ever, they demand financial services that stay in step with their busy, mobile lives.

Financial institutions must respond with products and services that deliver convenience, freedom and control. They can stay relevant to cardholders by enabling secure and easy digital transactions through their debit and credit cards. Banks should digitize, utilize, securitize and monetize their card programs to meaningfully meet their customers’ needs.

Digitize
Banks should develop and deploy digital solutions like wallets, alerts and card controls, to provide an integrated, seamless and efficient payments experience. Consumers have an array of choices for their financial services, and they will go where they find the greatest value.

Nonfinancial competitors have proven adept at capturing consumers via embedded payment options that deliver a streamlined experience. Their goals are to gather cardholder information, cross-sell new services and extract a growing share of the payments value chain. Financial institutions can ensure their cards remain top-of-wallet for consumers by developing a digital strategy focused on driving deep cardholder engagement. Digital wallets are the place to start.

The adoption curve for digital wallets follows the path of online banking’s early years, suggesting an impending sharp rise in the use of digital wallets. A majority of the largest retailers now accept contactless payments, according to a 2019 survey from Boston Retail Partners. And one in six U.S. banking consumers reported paying with a digital wallet within the last 30 days, according to a 2018 Fiserv survey. Almost three-fourths of cardholders say paying for purchases is more convenient with tokenized mobile payments, a Mercator Advisory Group survey found.

Financial institutions can deliver significant benefits to consumers and reap measurable returns by leveraging existing and emerging digital tools, such as merchant-based geographic reward offers.

Utilize
Banks need to provide their cardholders with comprehensive information about how digital solutions can meet their expectations and needs. Implementing digital tools, providing a frictionless financial service experience and helping customers understand and use their benefits can empower them to transact in real-time on their devices, including mobile phones, computers and tablets. Banks’ communications programs are important to encourage adoption and use the implemented digital products and services.

Securitize
Banks will have to balance digital innovation with risk mitigation strategies that keep consumers safe and don’t disrupt transactions. Digital payments are highly secure due to tokenization — a process where numerical values replace consumers’ personal information for transaction purposes. Tokenized digital wallet transactions are an important first step toward preventing mobile payments fraud.

Mobile apps that enable cardholders to receive transaction alerts and actively manage card usage also significantly improving card security. Fiserv analysis shows use of a card controls app may reduce signature fraud by up to 53%, while increasing card usage and spending.

Banks need strategies focused on detecting and preventing fraud in real time without impacting card usage and cardholder satisfaction. This can be a significant point of differentiation for card providers. A prudent approach can include implementing predictive analytics and decision-management technology. And because consumers want to be involved in managing and protecting their accounts, they should have the option to create customized transaction alerts and controls. Finally, direct access to experienced risk analysts who work to identify evolving fraud threats can significantly improve overall results.

A recent analysis from the Federal Reserve indicated debit fraud is running at approximately 11.2 basis points, which compares the average value of fraud to total transaction dollars. In comparison, Fiserv debit card clients experience only 5.08 basis points of fraud.

Card issuers balance risk rules that help mitigate fraud against cardholder disruption stemming from falsely-declined transactions. These lost transaction opportunities can reduce revenue and increase reputational risk. An experienced risk mitigation partner can help banks strike the right balance between fraud detection and consumer satisfaction to maximize profitability.

More Engaged Users Are

Based on these average monthly debit transactions: Gray = Low 12.6, Blue = Casual (medium) 18.3, High = High 21.4, Orange = Super (highest) 28.4
Net Promoter Score = Measure of cardholder loyalty and value in institution relationship
Cross-Sold Ration = Percentage of householders with a DDA for longer for longer than six months but open to a new deposit or loan account in the most recent six months
Return on Assets = Percentage of profit related to earnings

Monetize
Banks can turn digital solutions into engines of growth by creating stronger, more lasting consumer relationships. A digital portfolio can be more than just a set of solutions — it can drive significant new revenue and growth opportunities. By delivering secure, frictionless digital services to consumers when and where they need them, banks can maintain their positions as trusted financial service providers. Engaged users are profitable users.

Digitize. Utilize. Securitize. Monetize. Achieving the right combination of innovative products and exceptional consumer experiences will enhance a bank’s card portfolio growth, operational efficiency and market share.

How Innovative Banks are Eliminating Online Card Fraud

Card fraud has a new home. Just a few years after the prolonged and pricey switch to EMV chip cards, fraud has migrated from purchases where the card is physically swiped to transactions where the card is not present. The shift means that U.S. banks might be on the cusp of yet another move in card technology.

EMV chips were so successful in curbing cases of fraud where the card was swiped that fraud evolved. Fraud is 81 percent more likely to occur today in “card-not-present” transactions that take place over the phone or internet rather than it is at the point of sale, according to the 2018 Identity Fraud Study by Javelin Research.

Technology has evolved to combat this theft. One new solution is to equip cards with dynamic card verification values, or CVVs. Cards with dynamic CVVs will periodically change the 3-digit code on the back of a credit or debit card, rendering stolen credentials obsolete within a short window of time. Most cards with dynamic codes automatically change after a set period of time—as often as every 20 minutes. The cards are powered by batteries that have a 3- to 4-year lifespan that coincides with the reissuance of a new card.

Several countries including France, China and Mexico have already begun adopting the technology, but the rollout in the United States has been more limited. The new Apple Card, issued by Goldman Sachs Group, boasts dynamic CVV as a key security feature. PNC Financial Services Group also launched a pilot program with Motion Code cards in late 2018.

Bankers who remember the shift to EMV might cringe at the thought of adopting another new card technology. But dynamic CVVs are different because they do not require merchants to adopt any new processes and do not create extra work for customers.

But one challenge with these more-secure cards will be their cost. A plastic card without an EMV chip cost about 39 cents. That cost rose to $2 to $3 a card with EMV. A card with the capability for a dynamic CVV could cost 5 times as much, averaging $12 to $15.

But advocates of the technology claim the benefits of eliminating card-not-present fraud more than covers the costs and could even increase revenue. French retail bank Société Générale S.A. worked with IDEMIA, formerly Oberthur Technologies, to offer cards with dynamic CVVs in fall 2016. The cards required no change in customers’ habits, which helped with their adoption, says Julien Claudon, head of card and digital services at Société Générale.

“Our customers appreciate the product and we’ve succeeded in selling it to customers because it’s easy to use.”

He adds that card-not-present fraud among bank customers using the card is “down to almost zero.”

Eliminating card-not-present fraud can also eliminate the ancillary costs of fraud, says Megan Heinze, senior vice president for financial institutions activities in North America at IDEMIA. She says card fraud is estimated to cost banks up to $25 billion by 2020.

“A lot of prime customers ask for the card the next day. The issuer then has to get the card developed—sending a file out that has to be printed—and then it’s FedExed. The average FedEx cost is around $10. The call to the call center [costs] around $7.50,” she says. “So that’s $17. And that doesn’t even include the card.”

What’s more, dynamic CVVs could also create a revenue opportunity. Société Générale charges customers a subscription fee of $1 per month for the cards. The bank saw a more than 5 percent increase in new customers and increased revenue, according to Heinze.

Still, some are skeptical of how well a paid, consumer-based model would fare in the U.S. market.

“The U.S. rejected EMV because it was so expensive to do. It was potentially spending $2 billion to save $1 billion, and that’s what you have to look at with the use case of these [dynamic CVV] cards,” says Brian Riley, director of credit advisory service for Mercator Advisory Group. “If it tends to be so expensive I might want to selectively do it with some good customers, but for the mass market there’s just not a payback.”

Still, dynamic CVVs are an interesting solution to the big, expensive problem of card-not-present fraud. While some institutions may wait until another card mandate hits, adopting dynamic CVV now could be a profitable differentiator for tech-forward banks.

Potential Technology Partners

IDEMIA

Idemia’s Motion Code technology powers cards for Société Générale and is being piloted by PNC and WorldPay.

GEMALTO

Gemalto’s Dynamic Code Card hasn’t been publicly linked to any bank or issuer names, but the company cites its own 2015 Consumer Research Project for some impressive statistics on customer demand for dynamic CVV cards.

SUREPASS ID

SurePass ID offers a Dynamic Card Security Code. The company’s founder, Mark Poidomani, is listed as the inventor of several payment-related patents.

FITEQ

FiTeq’s dynamic CVV requires cardholders to push a button to generate a new CVV code.

VISA AND MASTERCARD

Visa and Mastercard are leveraging dynamic CVV codes in their contactless cards

Learn more about the technology providers in this piece by accessing their profiles in Bank Director’s FinXTech Connectplatform.

How Innovative Banks are Eliminating Online Card Fraud


technology-5-8-19.pngCard fraud has a new home. Just a few years after the prolonged and pricey switch to EMV chip cards, fraud has migrated from purchases where the card is physically swiped to transactions where the card is not present. The shift means that U.S. banks might be on the cusp of yet another move in card technology.

EMV chips were so successful in curbing cases of fraud where the card was swiped that fraud evolved. Fraud is 81 percent more likely to occur today in “card-not-present” transactions that take place over the phone or internet rather than it is at the point of sale, according to the 2018 Identity Fraud Study by Javelin Research.

Technology has evolved to combat this theft. One new solution is to equip cards with dynamic card verification values, or CVVs. Cards with dynamic CVVs will periodically change the 3-digit code on the back of a credit or debit card, rendering stolen credentials obsolete within a short window of time. Most cards with dynamic codes automatically change after a set period of time—as often as every 20 minutes. The cards are powered by batteries that have a 3- to 4-year lifespan that coincides with the reissuance of a new card.

Several countries including France, China and Mexico have already begun adopting the technology, but the rollout in the United States has been more limited. The new Apple Card, issued by Goldman Sachs Group, boasts dynamic CVV as a key security feature. PNC Financial Services Group also launched a pilot program with Motion Code cards in late 2018.

Bankers who remember the shift to EMV might cringe at the thought of adopting another new card technology. But dynamic CVVs are different because they do not require merchants to adopt any new processes and do not create extra work for customers.

But one challenge with these more-secure cards will be their cost. A plastic card without an EMV chip cost about 39 cents. That cost rose to $2 to $3 a card with EMV. A card with the capability for a dynamic CVV could cost 5 times as much, averaging $12 to $15.

But advocates of the technology claim the benefits of eliminating card-not-present fraud more than covers the costs and could even increase revenue. French retail bank Société Générale S.A. worked with IDEMIA, formerly Oberthur Technologies, to offer cards with dynamic CVVs in fall 2016. The cards required no change in customers’ habits, which helped with their adoption, says Julien Claudon, head of card and digital services at Société Générale.

“Our customers appreciate the product and we’ve succeeded in selling it to customers because it’s easy to use.”

He adds that card-not-present fraud among bank customers using the card is “down to almost zero.”

Eliminating card-not-present fraud can also eliminate the ancillary costs of fraud, says Megan Heinze, senior vice president for financial institutions activities in North America at IDEMIA. She says card fraud is estimated to cost banks up to $25 billion by 2020.

“A lot of prime customers ask for the card the next day. The issuer then has to get the card developed—sending a file out that has to be printed—and then it’s FedExed. The average FedEx cost is around $10. The call to the call center [costs] around $7.50,” she says. “So that’s $17. And that doesn’t even include the card.”

What’s more, dynamic CVVs could also create a revenue opportunity. Société Générale charges customers a subscription fee of $1 per month for the cards. The bank saw a more than 5 percent increase in new customers and increased revenue, according to Heinze.

Still, some are skeptical of how well a paid, consumer-based model would fare in the U.S. market.

“The U.S. rejected EMV because it was so expensive to do. It was potentially spending $2 billion to save $1 billion, and that’s what you have to look at with the use case of these [dynamic CVV] cards,” says Brian Riley, director of credit advisory service for Mercator Advisory Group. “If it tends to be so expensive I might want to selectively do it with some good customers, but for the mass market there’s just not a payback.”

Still, dynamic CVVs are an interesting solution to the big, expensive problem of card-not-present fraud. While some institutions may wait until another card mandate hits, adopting dynamic CVV now could be a profitable differentiator for tech-forward banks.

Potential Technology Partners

IDEMIA

Idemia’s Motion Code technology powers cards for Société Générale and is being piloted by PNC and WorldPay.

Gemalto

Gemalto’s Dynamic Code Card hasn’t been publicly linked to any bank or issuer names, but the company cites its own 2015 Consumer Research Project for some impressive statistics on customer demand for dynamic CVV cards.

SurePass ID

SurePass ID offers a Dynamic Card Security Code. The company’s founder, Mark Poidomani, is listed as the inventor of several payment-related patents.

FiTeq

FiTeq’s dynamic CVV requires cardholders to push a button to generate a new CVV code.

Visa and Mastercard

Visa and Mastercard are leveraging dynamic CVV codes in their contactless cards

Learn more about the technology providers in this piece by accessing their profiles in Bank Director’s FinXTech Connect platform.

Is Amazon Go Safe from Mobile Fraud?


mobile-fraud.png

With the introduction of Amazon’s new brick and mortar grocery store, Amazon Go, standing in line to pay at the cashier is a thing of the past. At Amazon Go stores, the customer’s mobile phone detects what items they have placed in their basket, and simply bills their account when they exit the store using a sensor. This is a massive shift in the way commerce is experienced. Despite the novelty in innovation, with the prevalence of identity theft, mobile fraud and credit card phishing, Amazon Go needs to provide consumers the assurance that this new, innovative payment experience is safe and secure.

Here’s how the new Amazon Go stores could impact the security of credit cards in existing Amazon accounts, as well as the potential impact of “invisible payments” on the banking industry, and what Amazon Go will likely do to enhance fraud prevention and mobile payment security.

Securing Existing Amazon Accounts
If you look at the total number of existing Amazon users, the platform has roughly 1 billion total credit cards on file. That’s a potentially huge security concern for Amazon Go, since fraudsters will likely try to phish those accounts. Those seeking to commit fraud in an Amazon Go store are more likely to sign up for a new Amazon account with a stolen credit card, since it is easier than penetrating Amazon’s existing security network. Rodger Desai, CEO of Payfone, illustrates this point:

“Whenever you buy something online, merchants and their processors look at where you’re sending the goods. When fraudsters change the “Ship To” from the address your bank has on file, it’s a clear signal that something may be amiss and requires further vetting. With Amazon Go, those traditional warning signals go out the window. So I can just login as “you,” walk out with stuff, and bill it to you. I think it further exacerbates a very weak identity authentication system. This is true for omni-commerce in general. Buying online and picking up in-store has the same new vulnerabilities.”

Amazon Go will need to utilize various methods to prevent mobile fraud. Technologies are being developed that analyze how people walk and hold their phone as they move in and out of the payment gate. After establishing a baseline for each customer, the software can then spot potential abnormalities as people exit the store and alert as potential fraud.

The Future of Invisible Payments
Amazon Go is attempting to set a standard for invisible payments that could then be applied to different industries and scenarios. What banks need to recognize is that there’s an underserved demographic of people for whom every second of the day is precious. A parent who would rather spend time with their children than wait in a grocery line, or a student who could squeeze in a visit to the gym if they didn’t spend so much time shopping. While the internet saves consumers money by giving them access to price comparisons, invisible payments (like the Amazon Go model) via mobile save people time.

It’s worth noting that invisible payment adoption probably won’t be equally distributed across the board; the older generation might not see that much use for it and prefer the perceived security of paying at the cashier. It is the younger demographic, and on-the-go professionals, who will be the most impacted by invisible payment technology moving forward. The key, Desai emphasizes, is establishing trust with the consumer and being “very conscious of how you’re supporting them” despite the risk that can accompany this payment experience.

Fraud Prevention & Mobile Security
A major security issue will be the provisioning of new accounts, where people might purchase a stolen credit card number on a black market website, then set up a new Amazon Go account on a burner phone to make purchases.

It remains to be seen how Amazon Go will cope specifically with this challenge, but there is an opportunity for banks and fintech companies to play a role in both identity fraud and mobile intelligence. Purchases made on phone numbers and/or devices that have only existed for a couple of days might trigger a fraud alert, for instance. It will be this familiarity with consumer purchase tendencies, and established track records with phone numbers and devices, that Amazon Go will likely use to detect fraud. At the end of the day, verifying mobile identity will be the critical authentication factor for Amazon Go.

A Quicker Way to Get Debit and Credit Cards to Your Customers


credit-cards-11-30-16.pngAs consumers continue to embrace online and mobile banking channels, financial institutions are reevaluating the branch’s role in modern banking. Historically, branches have served at the forefront of the financial institution and customer relationship. Even though digital account solutions provide new levels of convenience and flexibility, the branch remains a vital channel facilitating interpersonal interactions between financial institution and customer, and fosters greater in-depth communication between the two.

Instant issuance is establishing itself as a proven program to attract more customers to the branch. Instant issuance systems allow financial institutions to print credit and debit cards on-demand inside the branch, for new customers or when an existing customer needs a replacement card. When branches enable on-demand printing of credit and debit cards, both issuers and customers win. Banks that take the additional step in providing permanent payment cards on the spot realize a much stronger return on investment in terms of customer acquisition, satisfaction and loyalty.

New programs, like instant issuance, draw customers, especially millennials, because it reduces the wait time in receiving access to their funds. Contrary to common perception, cash is a large draw for millennials. According to a GoBanking Rates survey released in 2016, 60 percent of millennials still prefer to be paid in cash, which means the millennial reliance on debit cards will remain strong, presenting a natural opportunity to actively engage millennials more effectively in their branches.

While millennials may appear to operate much differently than prior generations, their core expectations are much the same. They seek convenience and want their financial institutions to provide new and innovative technologies that keep pace with the technologically driven world in which they live.

In today’s world, where bank customers are subject to card data breaches with alarming regularity, protecting customer data is paramount to the success of any financial institution initiative. Instant issuance provides an opportunity for financial institutions to lead the conversation around EMV® integration and security. EMV provides heightened security by embedding microprocessors inside debit and credit cards, replacing the magnetic stripe card.

Financial institutions that implement scalable, cost-effective solutions that are EMV-enabled are better able to educate customers on changes to the transaction process. As EMV adoption has been a source of uncertainty and concern for financial institutions, retailers and consumers alike, instant issuance provides a convenient method for providing much-needed knowledge around the shift.

Instant issuance proves to be a secure and affordable way for financial institutions to realize the value of their branch investment. By drawing customers into the branch and getting credit and debit cards to market quicker, issuers are keeping payment cards top-of-wallet and increasing interchange revenue.

As the branch continues to reassert itself as a strategically important banking channel, financial institutions that leverage instant issuance as a strategic differentiator and recognize its role in driving customer activity within their branches will be better positioned to exceed customer expectations.

To learn more about millennial payment trends, download the whitepaper, “What Small-to-Midsize Financial Institutions Can Learn From Millennials.”

EMV® is a registered trademark or trademark of EMVCo LLC in the United States and other countries.

Real Time Payments and the Untapped Opportunity of Corporate Credit Cards


credit-cards-11-7-16.pngCorporate credit cards are already a great source of revenue for banks. And there’s a lot of room for growth, both in terms of interchange revenue and value that banks can provide to their business customers. If banks look at how their customers currently use corporate credit cards, they’ll find an untapped opportunity to expand their usage.

Using corporate credit cards for accounts payable (AP) has obvious benefits: Businesses can time their payments to vendors more precisely, take advantage of the working capital extension available through their credit line, and benefit from rewards and cash back programs. In addition, compared to checks—the most common way in which businesses make AP payments—credit cards have very low occurrences of fraud.

The use of corporate credit cards in AP should be an integral part of a business’s cash management strategy, but it is not. MineralTree recently conducted a survey to assess the current state of corporate credit card use in the accounts payable function and uncover reasons why more AP spend is not being moved to corporate cards. You can read the full survey report here.

Key Survey Findings
Over a two-week period in late summer 2016, almost 200 finance and AP professionals completed an online survey exploring the state of credit cards in their business. Some of the most significant findings of the report include:

  • More than one-third of respondents are not using corporate cards for vendor payments.
  • The reasons businesses give for not moving more AP spend to commercial credit cards is varied and plagued with misconceptions.
  • Impacting the bottom line is the number one benefit cited by respondents for moving more spend onto commercial credit cards.

The Shift in Accounts Payable
To truly understand the state of credit card use in AP, respondents were asked which types of payments were made on their corporate credit cards: travel and expense payments, vendor payments (AP), or both. Only 50 percent of respondents use cards for both. More than one-third of respondents only use their cards for travel and expenses.

The chart below shows the number of vendor payments made by businesses who exclusively use their card for travel and expenses. About 80 percent of respondents make 50 or more vendor payments every month. Businesses who make more than 50 payments per month can strongly benefit from AP and payment automation and the ability to easily pay their vendors with credit cards.

For those businesses already using cards, adding AP spend onto cards is relatively simple. Finance policies are in place and department heads know the process for submitting and recording expenses.

These businesses can easily expand their policy to include vendor payments and improve their AP process at the same time. Ultimately, this will increase the “card-able spend” and the finance team will add additional value to the business by bringing in significant rebates. At a modest 1 percent cash back, companies earn $10,000 for every $1 million in card spend. Banks should recognize this as a significant opportunity and start marketing cards for AP purposes. Offering complete, packaged cash management solutions that solve problems as business clients see them will encourage them to move AP spend onto cards. The banks who do this early will find an untapped opportunity for new revenue through merchant fees and use of the card’s credit line.

Becoming an Apple Pay Bank: Should You Do It?


1-30-15-Emily.pngThe leadership team at Fremont Bank, based in Fremont, California, tries to stay on top of financial technology. “We’re directly across from the Silicon Valley,” says Chris Olson, Fremont’s chief operations and enterprise risk officer. Apple Inc. is headquartered just half an hour away in nearby Cupertino, so adoption of Apple products in the San Francisco Bay Area is high, he says. When the bank’s payment processor, Atlanta, Georgia-based First Data Corp., demonstrated Apple Pay to bankers in November 2014, Olson put in Fremont Bank’s application right away. The next month, the $2.7-billion asset bank became the 23rd financial institution to partner with Apple Pay.

Apple Pay launched in October 2014, but its market is limited, for now. It can only be used by iPhone 6 users within retail stores, and within apps for the iPhone 6, iPad Air 2 and iPad mini 3. The process is relatively painless: Consumers add their credit cards to Apple’s Passbook, which stores digital documents like tickets and boarding passes. To pay within a store, the customer holds the iPhone near the retailer’s point-of-sale terminal and authorizes the sale with a secure fingerprint biometric. Apple Pay users surveyed by market research firm Infoscout in December 2014 found paying the Apple way to be more convenient, faster and more secure than swiping a credit card.

As of January 20, 2015, only 54 financial institutions were listed by Apple as participating issuers, representing less than 0.5 percent of the banks and credit unions in the U.S. but 90 percent of credit card purchase volume, according to Apple. In other words, the biggest credit card issuers have signed on. More institutions are expected to follow.

The Apple Pay platform builds on tokenization, which essentially replaces a customer’s credit card number with a more secure identification. Banks and retailers have been working toward this as the industry shifts to EMV standards to address cybercrime. The adoption of Apple Pay at $118-billion asset Regions Financial Corp. was due in part to this shift. “To be able to put tokenized transactions in place in a digital wallet, [Apple Pay] aligns underneath our EMV strategy,” says Tom Brooks, head of retail products at Regions.

Payment processors play a key role in making Apple Pay a reality for community banks. First Data takes partner institutions through the process, working with Apple and other key players—Mastercard, VISA or American Express have to create the tokens for the bank—and reviewing the institution’s policies and parameters for transaction approval, says Stephen Hug, vice president of product management for First Data.

First Data’s role as a facilitator contributed to the speed with which Fremont Bank was able to partner with Apple Pay. For a bank going it alone, “that process will take six months. It took us six weeks,” says Olson.

Will Apple Pay result in a mutually beneficial relationship for the technology giant and its partner banks? Many big retailers are notably absent from Apple’s list of participating merchants, including Wal-Mart and Target Corp. Sporadic adoption by retailers coupled with a limited pool of iPhone 6 users means most consumers still haven’t caught on with Apple Pay. For banks with an expansive customer base or locations in tech-savvy markets, Apple Pay might make sense. At Regions, many customers already used their cards for their iTunes accounts, says Brooks. The Birmingham, Alabama-based bank has not disclosed how many of its customers use Apple Pay.

Fremont Bank’s location near a technology hub meant bank leadership was willing to bet that consumers in its market would be willing to adopt Apple Pay. But adoption has been low, just “a handful of actual transactions,” says Olson. “We’re just babes in the woods on this right now. We’re hoping to continue to talk to our customer base…and try to educate people on the benefits of using Apple Pay.”

Apple keeps a portion of the fee for both debit and credit card transactions, but declined to provide numbers for this story. Zilvinas Bareisis, senior analyst with research firm Celent, estimates those fees to be around 15 basis points for credit transactions and up to 3 cents per transaction for debit. Fremont Bank doesn’t issue credit cards—it partners with First National Bank of Omaha, expected to soon be an Apple Pay partner itself—and costs seem to be low. Fremont Bank paid First Data $5,000 up front to become an Apple Pay bank. Other fees, paid to First Data and Visa, are related to tokenization. Fremont Bank pays Apple half a penny per debit card transaction. Olson estimates that each debit card registered with Apple Pay costs the bank about 13 cents per month, but the bank does not pass those costs on to customers.

One thing’s clear: Banks can’t be on the fence about Apple Pay. If Apple Pay gains traction in the future, banks that are early adopters will likely become the default choice for consumers with multiple credit and debit cards, meaning a big bank credit card will likely trump small banks and their debit cards, if those cards are added to Apple Pay later. For Apple Pay to be successful for banks, it needs to drive more customers to the bank, and banks need to see more transaction volume to make up for the shift from a traditional credit card payment to Apple Pay. Without that increase in volume, income “just moves away from regular plastic cards to mobile and Apple Pay,” says Bareisis. “The bank loses out.”

What is Rick Fairbank’s Endgame?


credit-cards.jpgCapital One Corp. CEO Rich Fairbank is a smart guy, but I think he needs to work on his timing. I mean really, who announces a major credit card portfolio acquisition on the same day that the Dow Jones Industrial Average drops 519.83 point – or 4.62 percent – for an 11-month low, particularly when big banks like Citigroup, Bank of America Corp. and J.P. Morgan Chase & Co. led the way down?

On August 10, Capital One announced that it was acquiring the U.S. credit card business of HSBC Holdings PLC for approximately $2.6 billion, just as global equity markets were panicking over the combination of Standard & Poor’s historic downgrading of the United States’ credit rating, deep concerns about the wobbly financial state of major European countries like Italy and France, and the distinct possibility that the U.S. economy might be slipping back into another recession.  This followed a deal announced in June, when Capital One acquired ING Direct, the U.S.-based online banking subsidiary of Dutch giant ING Groep, for $9 billion.

Of course, Capital One had been working on the HSBC deal for months – so the exact timing of the August 10 announcement wasn’t something that Fairbank had much control over. But if you know anything about Rich Fairbank you know he’s a fearless strategist who won’t hesitate to pull the trigger on an acquisition if he believes it’s the smart thing to do.

I wrote a story about Capital One in the second quarter 2006 issue of Bank Director that was based on extensive interviews with Fairbank and W. Ronald Dietz, a long-time director who currently serves as chairman of the bank’s audit and risk committee. Back then, Capital One was in the early stages of transforming itself from a consumer finance company whose principal product was credit cards to something that was more along the lines of a traditional commercial bank. It had recently acquired two regional banks, New Orleans-based Hibernia Corp. and Long Island-based North Fork Bancorp., and Fairbank spent a lot of time during the interview explaining why he did that. And in the process, Fairbank also revealed a lot about the way he thinks when he thinks about strategy, and it’s interesting to look at the ING and HSBC deals in the context of what he said about strategy five years ago.

Fairbank made these points in that 2006 interview:

  • He foresaw the emergence of a bifurcated banking market in the United States where many consumer loan categories like credit cards, auto loans, home mortgages and student loans were being consolidated by large national players (think J.P. Morgan Chase in mortgages or Capital One in credit cards) that used their size and economies of scale to squeeze out community and regional banks — but where the deposit market remained under the control of those same community and regional players, which used their local connections to great competitive advantage. Fairbank concluded that Capital One had to be a factor in both markets, and so he embarked on an unusual national/local strategy that led to the Hibernia deal in 2005, the North Fork deal in 2006 and the acquisition of Chevy Chase Bank in 2008.
  • He wanted to diversify both sides of the balance sheet, but especially the liability side. In the early 2000s, Fairbank might have been more fixated on funding than anything else. Prior to its regional bank acquisitions, Capital One funded itself primarily by raising money from institutional investors in the capital markets. But the Russian bond default in 1998 had roiled the global capital markets to such an extent that finance companies like Capital One were deeply concerned about whether they would still be able to fund their operations at any cost. I got the sense that the Russian debt crisis was a seminal event for Fairbank, and he concluded that Capital One needed access to retail banking deposits – which are inherently more stable than capital markets funding – if Capital One was to survive as an independent company.
  • When he thinks about strategy, Fairbank always thinks about where the industry will be five years from now – not where it will be next year. Here’s what he had to say five years ago: “A strategy must begin with identifying where the market is going. What’s the end game and how is the company going to win? Typically companies work forward from where they are. And they think it is a bold move to change 10 percent from where they are. But when one starts from ‘This is the market, this is the end game, this is where the market is heading and this is the timing of when the market is likely to get there,’ you are faced with a very different kind of reality. It creates a much greater sense of urgency and allows the company to make bold moves from a position of strength.”

So, what observations can we make about Capital One’s most recent acquisitions in light of that 2006 interview? First, the HSBC deal would seem to signal the continued consolidation of the credit card market, and affirms Capital One as one of that industry’s major players. It might seem counter-intuitive (or, just plain dumb) to acquire another company’s credit card portfolio when we might be heading down the second leg of a double-dip recession, but Capital One is probably the most analytical company I’ve ever come across — they analyze everything! – so I assume they have factored in all of the likely economic scenarios, including a spike in loan losses if the economy does tank.

The upside? Capital One squeezes enough juice from the HSBC portfolio through cost saves and revenue enhancements that the deal is accretive to earnings in 2013, which is the company’s current projection. The answer to whether investors will support this transaction will probably come later this year or in early 2012, when the company plans on raising some $1.25 billion in fresh capital to maintain its Tier One capital level in the mid-9 percent range.

To me, the ING Direct acquisition was actually more interesting. Capital One says it will use ING’s consumer deposits to fund the HSBC credit card portfolio on an ongoing basis, and some commentators have tended to see the two deals as being linked, i.e. Capital One wouldn’t have bought ING Direct if it also wasn’t planning on acquiring the HSBC portfolio. But to me, HSBC was tactical while ING Direct was strategic. Not only did the ING Direct acquisition provide funding for the HSBC portfolio, it also diversified Capital One’s funding base into the online consumer space – and Fairbank has pursued the goal of greater funding diversification for a long time. Just as importantly, ING Direct gives Fairbank a platform that he can use to build a national online consumer bank, which is a completely different animal than a regional branch bank, and is a natural fit with Capital One’s credit card business. I think Fairbank’s endgame is to build a national consumer bank. My guess is that he has looked five years into the future and seen further consolidation of the consumer deposit market. He can try to build a national deposit franchise through additional brick-and-mortar acquisitions, but that is an expensive and time-consuming approach.  The ING Direct deal gives him another strategic option that might be faster and cheaper – and more fitting with Fairbank’s sense of urgency. 

Who Gains the Most From Final Interchange Rule


The Federal Reserve’s final rule released this week on the debit interchange or “swipe” fees that retailers must pay looks like a clear victory for the banking industry, as it will allow banks to charge double what had been previously proposed.

For some, it’s more of a victory than for others. Banks that have relied heavily on debit fee income to support their business models, such as TCF Financial Corp. in Minnesota, clearly have more to gain by the change from the proposed rule. The final rule allows banks to charge about 24 cents per transaction, up from about 12 cents under an earlier proposal (both of which include a surcharge for fraud protection).

Banks, thrifts and credit unions with less than $10 billion in assets are supposed to be exempt from the new rule, but it remains unclear whether the marketplace (i.e. Visa and MasterCard) will create a two-tiered system that protects the smaller banks.

An analysis by the research and investment banking firm Keefe, Bruyette & Woods (KBW) this week says TCF Financial Corp. had the most to gain from the change in the proposed rule. If you’ll remember, TCF is the bank holding company that sued the federal government last October over the constitutionality of the interchange rule, otherwise known as the Durbin amendment to the Dodd-Frank Act.

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TCF’s stock shot up 4.8 percent from Wednesday morning to early Friday afternoon on the New York Stock Exchange, to $14.40 per share.

KBW’s analysis shows that TCF, which has $18.7 billion in assets, will make 11 cents more per share  in 2012 earnings with the change just made to the final rule, all else being equal. That basically means TCF will see its earnings cut 22 cents per share in 2012 instead of 33 cents, as previously proposed. The analysis doesn’t take into account any possible changes to fees, such as an annual debit fee for consumers, that banks may implement to make up for the loss in fees collected from retailers.

Other banks that have the most to gain from changes in the rule, according to Keefe, Bruyette & Woods, include Synovus Financial Corp. in Columbus, Georgia; Regions Financial Corp. in Birmingham, Alabama; and BancorpSouth, Inc. in Tupelo, Mississippi.

Not surprisingly, TCF announced yesterday that it was requesting permission to drop its lawsuit in the U.S. District Court in South Dakota, citing both the Federal Reserve final rule and the fact that it lost an appeal in federal court this week on the matter of a preliminary injunction.

“While we continue to believe that the Durbin Amendment is unconstitutional because it requires below-cost pricing and exempts 99% of all U.S. banks, we believe our lawsuit has served its purpose in demonstrating the unfairness of the Durbin Amendment and that it is time for us to move on,” said William A. Cooper, the company’s chairman and chief executive officer, in a statement. “The Federal Reserve Board’s final rule is an improvement from its initial proposal and recognizes many of the points we made in our case.”

Why Smaller Banks Should Worry About Interchange Fees


If you’re a bank CEO or director, you’re probably getting a little tired of Uncle Sam reaching into your institution’s pocket and pulling out handfuls of cash. Last year it was the new federally-mandated restrictions on account overdraft fees, which threatened to deprive banks of an important revenue stream just as they were struggling to recover from the effects of a deep recession in the U.S. economy. Fortunately for the industry, a significant percentage of retail customers opted into their bank’s overdraft protection plan, so the economic impact has turned out to be less than feared.

But then along came the Dodd-Frank Act, which not only imposes a greater and more costly compliance burden on the banking industry, but also drastically reduces the interchange fee that big banks–defined as $10 billion in assets or larger–are permitted to charge merchants on debit card transactions. The Act directed the Federal Reserve to set the maximum rate for debit card transactions, and in December the Fed proposed a cap of 12 cents–down from an average of 44 cents per transaction today.

The Fed is still soliciting comments under its normal rule-making process, and is required by Dodd-Frank to finalize the new rate by April 21. A 12-cent cap would result in a 70 percent to 85 percent reduction in debit card income for large banks, according to an estimate by the consulting firm Raddon Financial Group.

As bad as that sounds (and it is bad), the outcome of this latest threat to bank profitability is far from clear.

Raddon Vice President Bill Handel says that large banks like J.P. Morgan Chase & Co. are already considering a variety of strategies to mitigate the impact. For example, J.P. Morgan is testing a monthly $3.50 debit card fee in Green Bay, Wisconsin. (Under the current system, merchants end up paying the interchange fee, while retail bank customers are able to use their debit card for free.) The bank is also testing a $15 monthly checking fee in Marietta, Georgia.

One possible outcome of the new fee cap is that large banks will have to start charging for things–like debit cards and checking accounts–that used to be given away for the purpose of attracting core deposits. “The ‘free’ environment that we have been operating under will cease to exist,” says Handel.

The only problem is, Raddon’s research shows that consumers have become so accustomed to getting their retail banking services for free that they will balk at paying a monthly debit card fee. Instead, they will be more likely to either reduce their debit card usage in favor of paper checks (which are more costly for the bank to process)–or look for a free debit card at a smaller bank that isn’t affected by the cap. And that would seem to give small banks a huge competitive advantage since they could still offer their debit cards and checking accounts for free.

Not so fast. Smaller banks might think they’re shielded by Dodd-Frank from the sharp economic impact that large banks will feel, but that protection might not hold up in the real world outside of Washington, D.C. Predicts Handel, “We don’t believe the less-than-$10 billion exemption will hold up over the long haul.”

Visa Inc., the country’s largest card payments company, has said it will adopt a two-tiered pricing system for debit card transactions, one for large $10-billion-plus banks that will reflect the new Federal Reserve mandated cap on fees, and a second system for smaller banks that does not place a cap on fees. But Visa and its smaller payments competitor – MasterCard Worldwide – are member associations dominated by the same mega-banks that will be most hurt by a 12-cent cap. Handel says it’s not logical to assume that large banks like J.P. Morgan Chase and Bank of America will passively sit by while they lose debit card and checking account customers to small banks that can afford to subsidize those products with their higher interchange income.

“[The card companies’] brands are backed by the big banks,” says Handel. “If the big banks say to Visa and MasterCard ‘You can’t continue to have a two-tiered system,’ they will have to listen.”

A company spokesman said yesterday that MasterCard had not yet made a decision on whether it will adopt a two-tiered system for debit card fees, but don’t be surprised if the 32-cent per debit card transaction advantage that smaller banks seem to enjoy thanks to Dodd-Frank ends up much, much less.