Tuesday, July 29, 2008

Chase Paymentech Breakup = New Payment Processing Option for Online Retailers?

More changes are coming in online payment processing. as more payment alternatives slowly gain traction, with more (can you say HomeATM?) on the way. Soon, online retailers will have another payment-processing option as a big processor plans to split into two.

That company is Chase Paymentech Solutions LLC, which
claims to process two out of three e-commerce purchases made by U.S. consumers.

Chase Paymentech Solutions is a 12-year-old joint venture now owned by First Data Corp., the biggest U.S. payment card processor, and J.P. Morgan Chase & Company, one of the country’s biggest banks and card issuers.

After private equity firm KKR (which yesterday announced it is going public) bought First Data, Chase had the option of busting up the joint venture, and announced in May it would do just that.

What it means for the many online retailers that use Chase Paymentech as a processor—including Walmart.com, Zappos.com, Overstock.com and Buy.com—is that the company will split nearly in two, with Chase taking the Chase Paymentech name, 51% of the assets, the Dallas headquarters and most of the employees. Importantly for e-retailers, Chase will retain the Salem, N.H., processing facility that specializes in handling online and catalog transactions.

However, First Data will get a copy of the Salem technology and is expected to launch its own e-commerce processing operation.

Once First Data gets that operation up to speed, expect increased competition for the processing business of online retailers, says payments consultant Steve Mott of BetterBuyDesign. “Many of them will have multi-year contracts, so there will not be a mass exodus right away,” Mott says. “But in time there should be a very vigorous competition for these customers

More of the details of the division of contracts and assets will be forthcoming over the next few months, says Mia Shernoff, executive vice president of marketing at Chase Paymentech. Ultimately, she says, retailers will benefit, “because online merchants will get two companies very focused on investing in the business in their own way.”
A First Data e-commerce processor would join an already crowded field in which prices keep going down, especially for larger online retailers. The competition among large processors has driven processing costs for big e-retailers down to under a penny per transaction, says Allen Weinberg of the Glenbrook Partners payments consulting firm.

(Editor's Note: Regardless of lower processing fees due to competition, the Interchange Fees remain much higher than they would be if processed as a "PIN Based" Transaction)
There are certainly plenty of alternatives, but as of now...they're all the same. Providing online retailers with a PIN Debit/Credit option would place HomeATM into a unique position to change the way transactions are done online.

Meanwhile, consumers have several ways to pay other than the familiar pieces of plastic carrying the brands of Visa, MasterCard, American Express and Discover. Adoption of alternative payments is growing gradually and analysts expect it will pick up—especially if more merchants offer and promote these alternative payment types.

Many consumers continue to shy away from buying online because they fear their personal or payment card information will fall into the wrong hands. (What I call the "Hand It Over Buddy" effect) and why yesterday I posted my article entitled: "Reverse Matriculation: Bringing the POS Device Home" in which I talked about why we should put the swipe/PIN Entry device into the hands of online shoppers so they don't have to enter card information.)

In a survey late last year, 75% of respondents agreed that they did not like giving out their credit card number or personal information online,   including 36% who strongly agreed with that statement.

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The Top 25 Internet Retailers

According to Internet Retailer, in aggregate the Top 500 retailers accounted for a total of $101.7 billion, of the nation's $166 billion in online retail sales in 2007.

The Top 500 grew their online sales by 21.6 percent.  The top three e-commerce application and service providers will be listed by Internet Retailer in its August issue.  To apply for a free subscription (US subscribers only), click this link.

Published by Chicago-based Vertical Web Media LLC, Internet Retailer is a monthly national business magazine, Web site conference and directory that serve the retailing community. The Internet Retailer family of products focuses on the Internet's vital role in a wide array of retailing activities, including Web merchandising, supply chain management and multichannel integration.

Here's the Top 25 and their 2007 numbers:

(from Internet Retailer’s Top 500 Guide: America’s largest e-retailers (based on 2007 sales)

1. Amazon.com ($14,800,000,000)

2. Staples.com ($5,600,000,000)
3. OfficeDepot.com ($4,900,000,000)
4. Dell.com ($4,200,000,000)
5. HPShopping.com ($3,360,923,280)

6. OfficeMax.com ($3,162,800,700)
7. Apple.com ($2,700,000,000)
8. Sears.com ($2,589,840,000)
9. CDW.com ($2,407,520,463)
10. Newegg.com ($1,900,000,000)

11. QVC.com ($1,880,530,000)

12. Best Buy.com ($1,780,833,285)

13. SonyStyle.com ($1,774,347,120)

14. Walmart.com ($1,574,999,975)

15. JCP.com ($1,500,000,000)

16. CircuitCity.com ($1,400,000,000)
17. Netflix.com ($1,205,000,000)
18. Costco.com ($1,200,000,000)
19. Target.com ($1,153,916,993)
20. VictoriasSecret.com ($1,111,712,000)

21. Williams-Sonoma.com ($1,104,000,000)

22. TigerDirect.com ($974,610,000)

23. LLBean.com ($948,750,000)

24. Gap.com ($903,000,000)

25. HSN.com ($871,200,000)

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Canada Gets Ready for Chip and PIN Adoption

The rapidly evolving payment industry is undergoing a new chip and PIN revolution in Canada and merchants will need to stay on their toes to keep up. Industry observers, including a newly appointed Canadian INSIDE Contactless executive weigh in on the issue and Rafael Ruffolo writes about it for ComputerWorld Canada:

By: Rafael Ruffolo, ComputerWorld Canada (29 Jul 2008)

With chip and PIN contactless technology set to hit widespread adoption by 2010, industry watchers are advising merchants to look at how the new payment method can benefit them in fraud reduction and value-added services, rather than worrying about the initial implementation costs.

“This is a little like the early 1980s with PCs,” Catherine Johnston, president and CEO at Advanced Card Technologies (ACT) Canada, said. “We’re beginning to understand the capabilities and the things we will be able to do with chip cards and I think merchants will need to look at the positive gains.”

Whether the positives of chip and PIN – which refers to a movement which will equip all credit cards with a chip and PIN number–will outweigh the implementation costs for Canadian merchants remains to be seen. Members of the payment card industry, including Interac Association, MasterCard Canada Inc. and Visa Canada, are in the midst of a chip and PIN trial in Ontario’s Kitchener-Waterloo area.

France-based payment chip maker INSIDE Contactless creates chip sets that are used for access control, ID, transit and other applications. Kim Madore, the recently appointed vice-president of sales and business development for the company’s Canadian operations, said the results of the Southern Ontario rollout has been promising and mass migration to the contactless payment technology should get underway this fall.

“For merchants, it will be fraud reduction that gives them the business model to move forward with this,” Madore said. “Plus, Canada has had PIN since 1992 when Interac was introduced, so consumers will be very accustomed to the technology and recognize the security benefits.”

But while the hype around fraud reduction might be enough to get consumers onside, some merchants might have a difficult time making a business case on that fact alone. Lise Dellazizzo, senior vice-president of technology research at Harris/Decima said that even though widespread rollout will occur within the next two years, many merchants haven’t had a chance to work with the technology yet..

A significant problem for some merchants, Dellazizzo said, is the expensive hardware and software costs involved in the migration. She said while businesses in the food services industry – which often rent their payment machines – may get off relatively easy, it will be a far different story for merchants in other fields.

“For the folks in the oil and gas sector, retrofitting the pumps will be a costly job,” Dellazizzo told ComputerWorld Canada earlier this year. “It’s been very difficult for the card associations and the players to convince these merchants that there is an ROI in making the move. And when it costs you $15,000 to replace each pump and you’ve got thousands of them across the country, it can be a tough pill to swallow.”

But according to Madore, merchants in many industries – including the oil and gas sector – are already taking steps to plan for the technology. “With respect to Canada and the gas industry, many of the pumps are already retrofitted,” she said. “You take a Petro Canada and they’ve even gone to the extreme of retrofitting for contactless technology as well.”

Johnston agreed with Madore, saying that most service companies have experienced similar changes over the last few decades and should be able to handle the changes that come with contactless payment technology. She added that as early as ten years ago, credit and debit card readers were missing from gas pumps.

“We’re now looking at technology like mobile payment, near field communication (NFC), and dual-interface cards that have both contact and contactless technology embedded,” Johnston said.

Her advice to merchants was to accept the fact that the payment industry is constantly evolving and take advantage of the advancements the technology can offer.

“For instance, if you look at a smaller merchant, they really don’t have a strong business case for issuing their own loyalty program cards,” she said. “But because chips can have multiple applications on the same card, merchants can band together and each put their own applications on consumer credit cards.”

Besides cutting down on the amount of credit cards in your customers’ wallet, Madore said the technology can also make transactions more personal.

“What if you went to a checkout at Tim Horton’s and the terminal actually greeted you with personalized information?” she asked. That aside, the bottom line for merchants is that it won’t be a matter of “if” they upgrade, but rather “when” they upgrade.

Visa Canada has already said Canadian businesses will need to get onboard with the new technology by October 2010 or the liability for payment fraud claims falls to the merchant themselves.

The ongoing Kitchener-Waterloo payment industry trial is scheduled to be completed this fall.

Copyright © 2008

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