Pub. 13 2016 Issue 1

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G N E W M E X I C O R E A L I Z E D R E A M S Spring • 2016 17 From Apple Pay to Walmart Pay, the fi- nancial industry has been inundated with alternative payment options. While some are more popular than others, digital pay- ment offerings present both growth oppor- tunities and new challenges for community banks. And ready or not, it’s time to take notice. According to an eMarketer forecast report on mobile proximity—or digital—pay- ments, while 2015 closed with about $9 billion in digital payment transactions, that number is expected to rise to $27.05 billion in 2016—and $210.45 billion by 2019. Although there are a few exceptions, the major mobile payments players can be bro- ken into two distinct factions—one that will propel financial institutions forward, and one that stands to take a chunk out of your interchange income. Mobile Wallets from the Card Space The first group comprises the mobile wal- lets that preserve the existing interchange model by utilizing the credit card network rails (Visa, MasterCard, American Express and Discover). These include: • Apple Pay • Android Pay • Samsung Pay From a consumer standpoint, these mo- bile wallets conduct payments using Near Field Communication (NFC) at a growing list of supported terminals. The user simply “taps to pay” at an enabled terminal to com- plete an instant, secure transaction. According to the Aite report, Mobile Proximity Payments: A Disruption in the Force, “NFC has the greatest potential to become the standard transmission meth- od for mobile proximity payments. NFC’s nearly ubiquitous presence in smartphones, the rapid increase of NFC-capable termi- nals driven by EMV reterminalization in the United States, and the launch of Apple Pay will accelerate implementation and usage of NFC payments.” The Merchant-centric Crowd Conversely, the second set of digital pay- ments players is largely composed of retail- ers. This relatively new and growing group uses the ACH rails to facilitate payments. Why the push for this breakaway faction? Very simply, money. Going the ACH route essentially costs these merchants little to no money, whereas with the existing card rails, they pay a percentage of each transaction to both the card network and the issuing bank—the interchange fee. By eliminating the interchange model—they boost their profit margins. This merchant group in- cludes: • CurrentC/Chase Pay • Walmart Pay • Target REDcard Most of these digital payment alternatives work by having the consumer download an app and scan a QR code on their phone to facilitate the payment. The barcode changes after a few transactions—their formof secu- rity. The drawback is, taking a picture of a QR code on a screen doesn’t seem particu- larly secure or technologically advanced. Without a Doubt—the Card Space Wallets Are Your Bank’s Ally Ultimately, it’s the digital wallets from the card space that will continue to drive com- munity banks forward and preserve their interchange income. By riding the existing card rails, they’re sustaining a process that is far from broken. The biggest difference these mobile wal- lets have brought forth is an added layer of fraud security through tokenization. In- deed, fraud prevention is a major impetus driving change in the payments space. The industry has made great strides with EMV chip cards, which surround static card It’s Time to Adapt to the Digital Payments Landscape BY MATT HERREN, COMPUTER SERVICES, INC. numbers with dynamic data to encrypt the transaction. And that’s a big boon to fraud prevention. But tokenization takes securi- ty yet another step: not only does dynam- ic data surround the credential, but also the actual core credential itself—the card number—changes. Essentially, merchants receive one-time credentials that can only be used for a single transaction—making it virtually impossible for cybercriminals to predict what the next dynamic credentials will be. Risks of Ignoring Mobile Wallets Banks choosing to not engage with alter- native payments like Apple Pay, et al. risk losing consumer mindshare. If your card can’t be added to a digital wallet, consum- ers are going to use someone else’s card. Think of it this way: more than 80 percent of Americans have a smartphone of some type. So will phones be a larger or smaller part of everyday life in five years? The answer is pretty clear. How to Get Started To ensure you’re serving as many custom- ers as possible, your best path is enrolling in Apple Pay, Android Pay and Samsung Pay. Itmakes sense, since the card networks have waved their costs for processing and facili- tating the payments. And when you’re ready to jump into the mobile wallet pool, you should first reach out to your debit card processor. Your pro- cessor should act as your partner in com- pleting your agreements with MasterCard and Visa and your addendum with the digi- tal wallet providers, as well as ensuring your bank’s card art and logo are populated in the wallets and, finally, informing you of your “go live” date. Digital Truly is the Future of Payments As for securing customer buy-in, it comes down to making them aware that digital payments are available, and en- couraging their use. Right now, about one-third of mobile devices are capable of making proximity payments, but from now on, all new models will feature this capability. Since people naturally upgrade their phones every couple of years, digi- tal payments will rise exponentially. Will your bank adapt?  AsproductmanagerforPaymentAnalytics,MattHerrenhasexpanded CSI’s ability to address fraud through early identification of merchant breachesandfraudulenttestingtechniques.Hisworkhelpsto increase bank profitability through fraud mitigation and card portfolio analysis, allowing customers to realize industry-leading results and maximize program performance.