Industry voice: Payments processors under pressure: customer success stories from the software industry

Page 1 of 2Introduction and analysis Scott Haug, Waterstone

The payments ecosystem continues to face significant change driven by the continued acceleration of traditional online commerce coupled with the increasing relevance of mobile technology—all of which is driving a new set of omnichannel consumer expectations. Big Data/Analytics, Internet of Things (IoT), Cloud, and "as a Service" business models are creating a myriad of new revenue generation and operating model improvement opportunities and changing the nature of competition and scale economics. In many ways, what is happening within the payments space mirrors what has already begun to change the traditional technology sector.

There has been a lot of focus on the consumer end of the payments value chain in terms of emerging solutions, mobile, digital wallets, and the changing nature of retail. However, these changes are also putting significant pressure on "behind the scenes" players in the merchant acquisition, processing, and services space, including:

Increased pricing pressure from traditional and new competitors and commoditization of core offerings - all driving an increased focus on customer retentionRise of ecommerce and mobile driving increasing merchant demand for integrated, omnichannel capabilitiesPressure on historical go-to-market and customer success models as well as limited ability for certain players to drive significant EBITDA via increased scale aloneIncreasing customer expectations for support and value-added services beyond just enabling payments

These challenges are compelling payment services providers, particularly merchant acquirers/processors, to transform many aspects of their business model to be successful. Three key value-creation themes have emerged as critical for success:

There has been substantial activity among leading players in the first two value-creation areas, particularly in new capabilities and offers, SMB segment focus, and go-to-market strategies and partnerships. In addition, we see the third value-creation area—optimizing customer experience and leveraging post-sales services and support—as an exceptional and underleveraged opportunity to enhance profitability and improve retention.

This is particularly true as some players can no longer drive profitability through scale economies alone. Our experience within the technology sector, particularly around software and other recurring revenue businesses, suggests that there are several lessons learned that are directly relevant to the payments processing ecosystem.

The payments ecosystem and key players in the value chain will continue to evolve towards software-enabled, integrated payments solutions and services. Further, we foresee growth in Cloud-enabled, potentially "as-a-Service" business models, either directly or through key partnerships.

In the transition to Cloud-enabled, Software-as-a-Service (SaaS) models, software companies have identified an increased need and opportunity to focus on improved customer experience. Doing so strengthens the role and contribution of services and support resources to grow revenues, reduce attrition, and enhance customer lifetime value. This is particularly relevant to players that have reached the point of maximum economies of scale and need to drive incremental EBITDA through differentiating products/services and enhancing customer support.

Page 1 of 2Introduction and analysis

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Industry voice: Will Apple Pay pave the way for more secure mobile payments?

Even before the release of the iPhone 6, the rumour mill had been in overdrive on what we could expect from the device's new features and functionality.

One of the most significant announcements to have been made at last week's event was the launch of Apple Pay: a new mobile payments service using NFC to enable contactless payments.

Although mobile contactless payments hold the promise of greater convenience with quick and easy 'wave and pay' transactions, they have not, to date, reached mass appeal.

The big question, now, is can Apple succeed where others have failed and take contactless payments from a niche service to more mainstream adoption?

At the heart of the issue, and probably one of the most important factors in determining if it will catch on, is the security of the system.

This is because retailers in particular have been a prime target for cyber criminals with POS systems proving to be a valuable commodity, and malware targeting credit and debit card readers or cash registers, steadily on the rise.

The cyber-attacks on US retail giants Target, Neiman Marcus and Michaels Stores - which involved malware on POS systems - had a profound impact on sales and consumer confidence in the safety of credit-card information at POS terminals.

Of course, Apple don't have control over POS systems, but its new mobile payments should provide reassurances for consumers, as it uses a new approach which would mean that it is harder for criminals to perpetrate the kind of widespread data breaches we've seen this year.

From the first analysis of Apple Pay, it appears that Apple is attempting to revolutionise payment methods into a far more secure and transaction-specific system which could only benefit the retail industry and users.

The critical difference here is that it uses "Secure Element," an encryption method to protect payment information, using a one-time payment number. Personal Credit Information is not transferred in the transaction, instead a transaction code is sent to the bank which uses an algorithm that tells the system where money needs to go.

If we add the extra stage of security in fingerprint recognition, this is a very powerful and secure change in transmitting PCI data. It's an approach which could even put pressure on banks to change the way a standard debit or credit card transaction takes place and to change their security protocols.

From what we know so far, and the workflows that Apple is proposing with the Device Account Number being used alongside a transaction-specific dynamic security code, this looks like a significant advancement in securing mobile payments.

The trade-off between security and ease-of-use for consumers has always been a challenging balance to strike. It could just be, that with this latest innovation, Apple has been able to blaze a new trail in the evolution of safer payments, pioneering a more secure method as transactions are not creating re-usable data

Time will tell if consumers are now ready to swap cash and cards for mobile payments; that said, adoption rates for NFC payments are rising and the addition of mobile payments by Apple - which has a loyal base of customers - looks set to shake things up further.

Closer assessment of the security will of course have to wait until the phones are fully in use and theory is put into practice.

What we do know is that with Apple's announcement that security and privacy are core to this service, we should anticipate a robust system that can protect consumers and their data as fully as possible.

Nick Pollard is Senior Director of Professional Services, Guidance Software

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iWatch mobile payments could change everything

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