$38 BILLION Dolllars Later...Someone Noticed!

Yesterday the New York Times wrote an editorial piece entitiled: The Debit Trap.  A more accurate title would have been "The Signature Debit Trap" but, nonetheless, they made their point.  I started a company with an associate (later sold to Pay By Touch) called "P.A.I.D." an acronym for "Payment Authorized Instantly Debited" which transformed a paper check into a one-time debit transaction. 

The business was based on the fact that, back then, debit transactions were approved only if funds were available in the account.  As paper check use dwindled and check card use rose, banks saw a drop in revenue derived from bounced checks.  So, guess what?  They lifted the restriction on "signature debit" cards being approved only if funds were available...in order to derive bounced "check card" fees. 

It took a $38 Billion dollar year before anyone noticed, but apparently the NY Times has:  Here's what they have to say:  But first, the question begs to be asked.  If banks "did not" generate $38 Billion by charging $35 for a cup of coffee, how much would the bailout have cost tax payers?  Hmmmm....  (oh, and by the way, if you enter your PIN every time you make a purchase, you would avoid these fees, because PIN debit transactions are "declined" if funds are not available.)   Do you see why the banks and card companies push the less secure signature debit card by attaching rewards.  The real reward is the $38 billion to the banks and the extra 100+ basis points derived from Interchange.)  But don't listen to me.  I'm just being cynical.

Editorial from the New York Times: Published: August 19, 2009

Not many people would knowingly pay more than
$35 for a cup of coffee. But far too many people are getting saddled —
with no warning — with outsized bills for minor purchases, under a
euphemistically labeled “overdraft protection program” that most major
banks have adopted over the last 10 years.

Before that, most banks would simply have rejected debit transactions, without a fee, when the card holder’s account was empty. Now, they approve the purchase and tack on a hefty penalty for each transaction.

Moebs Services, a research company that has conducted studies for the government as well as some banks, reported recently that banks will earn more than $38 billion this year from overdraft and bounced-check fees. Moebs also estimates that 90 percent of that amount will be paid by the poorest 10 percent of the customer base.

Federal regulators who stood idly by while this system evolved are considering new overdraft rules that could provide more transparency. If they do not move quickly and aggressively to protect consumers, Congress should step in.

Banks have historically covered bad checks for valued clients, who were invited to opt in to overdraft protection or to link their checking accounts to savings accounts or to lines of credit. But as more people began to use debit cards, the banks started to view overdraft fees as a major profit center and started to automatically enroll debit card holders into an overdraft program. Some banks instituted a tiered penalty system, charging customers steadily higher fees as the overdrafts mount.

A study by the Center for Responsible Lending, a nonpartisan research and policy group, describes what it calls the “overdraft domino effect.” One college student whose bank records were analyzed by the center made seven small purchases including coffee and school supplies that totaled $16.55 and was hit with overdraft fees that totaled $245.

Some bankers claim the system benefits debit card users, allowing them to keep spending when they are out of money. But interest rate calculations tell a different story. Credit card companies, for example, were rightly criticized when some drove up interest rates to 30 percent or more. According to a 2008 study by the F.D.I.C., overdraft fees for debit cards can carry an annualized interest rate that exceeds 3,500 percent.

The banks, which have grown addicted to overdraft fees, will almost certainly resist new regulation in this area. But there are several things that federal regulators must do to protect the public.

First, banks must be barred from automatically enrolling customers in overdraft programs. This must be a service that customers opt in to — and only after they are provided full information about the fees and the penalties they will incur. These disclosure statements must meet the same rules laid out in truth-in-lending laws, since overdraft charges are essentially short-term loans.

Banks must also be required to warn customers in real time when a debit card charge will overdraw their accounts — and what fees they will incur if they still decide to proceed with the purchase.

This will require new technology. But there is almost no chance that the banks will invest in it unless they are legally required to do so. Until that happens, buyers beware. That cup of coffee may be even more expensive than you realize.

Readers' Comments

Readers shared their thoughts on this article.

• Read All Comments (113) »

Experts: More Heartland Style Breaches Expected: This is Probably Just the Start!

Experts: More Heartland-Style Breaches Expected

Despite Arrests, Analysts say 'This is Probably Just the Start'

Linda McGlasson, Managing Editor

The announcement by federal prosecutors that three hackers have been indicted for the Heartland Payments System breach comes a week before the payments processor faces a judge in federal court over two class actions suits.

In response to the indictments, information security experts say this activity might represent a battle won, but the war against hackers is nowhere near over. "

The fact that three folks (assuming that that's all there were) can do all this says that it's pretty darn cost-effective to steal card data," says David Taylor, founder of the PCI Knowledge Base. "Talk about 'low overhead.'" "It's always great to see the bad guys being hauled in, especially with a case this big, but it would be a mistake to assume that there aren't other criminals out there with similar goals and skill sets," says Tom Wills, Senior Analyst, Security & Fraud at Javelin Strategy and Research. Because law enforcement and the various victim companies' fraud departments did such a good job of investigating the case, it looks like prosecutors stand a good chance of getting a conviction, he notes. "Although we now know the form of attack that (Albert) Gonzalez and his accomplices used, it would be valuable for the information security community to get a detailed, blow-by-blow description of both the attacks and countermeasures adopted against them."

First Signature Capture PIN Pad to Achieve PCI 2.x Approval

Fremont, Calif., Aug. 20, 2009--UIC’s PP795 received formal PCI approval on August 19, 2009.



The PP795 is the first signature capture device to achieve approval under the newly strengthened PCI 2.1 requirements. PCI now requires MSR security to protect card data in the terminal.



"PCI approval of the PP795 demonstrates UIC’S expertise and leadership in designing and manufacturing advanced payment devices," says Tom Siegler, VP and GM for UIC USA. "We are very proud to bring the first signature capture enabled PIN pad terminal to market with MSR security."

Editor's Note:  I suppose that PCI approval of HomeATM's SafeTPIN demonstrated our expertise and leadership in designing and manufacturing "advanced" payment devices as well and we remain the first and "only" eCommerce enabled PIN Pad terminal in the marketplace!

PP790SE Features:(click here for PDF)

• Excellent price/performance
  


• Fully programmable
  


• Outstanding color display
  


• Resistive touch/signature pad for high quality capture
  


• OPOS and JavaPOS compliant
  


• Secure remote Key Management
  


• PCI 2.1 approved and EMV certified
  


• Supports up to six languages
  


• Excellent ergonomics
  


• Countertop, handheld or stand-mounted use
  Micro SD card and contactless payment options
  

The PP795 will be shipping in Q3 2009 equipped with UIC's high performance MSR and optional card readers.



UIC continues our commitment to developing cost-effective, high performance products for the retail and banking markets.



Visit us at www.uicusa.com to see our full line for data collection and transaction processing products.



About UIC:



Since its inception in 1985, UIC (Uniform Industrial Corporation) has been a leader in Electronic Commerce/Data Collection systems and components for Banking, Retail, Access Control, Lead Capture, and Auto-ID solutions. UIC designs, develops, and manufactures easy to use products that combine affordability and reliability with high quality and performance. Headquartered in Taipei Taiwan with full service operations in Fremont, CA and Dundee UK, UIC has a worldwide network of Clients, Resellers and Distributors.



Source: Company press release.

"Payments Opportunites: Finding the White Space"

Payments Opportunities: Finding the White Space

Report Published by Celent

Electronic
payments remain an area of high growth, with a 10% to 20% CAGR around
the world. There is huge untapped potential in markets such as
Indonesia, Russia, China, India, and Saudi Arabia. Yet market entry can
be difficult, with economies of scale and network effects creating huge
barriers to entry. By establishing a clear target based on geography,
customer and payment flow, new entrants can create viable niches.



In a new report, Payment Opportunities: Finding the White Space, Oliver Wyman examines various opportunites for new payment plays across the globe.

• Prepaid cards used for business to individual payments, such as
  payroll cards for U-Haul and employee inscentive programs for Coca-Cola.


• Airline ticket payments in China with China PnR.


• Alternative electronic payment systems (AEPS) in Russia such as
  OSMP and Cyberplat. These providers accept cash for payments such as
  mobile top-ups and charging a convenience fee to the payer.

In each case, the payments concentrated on a specific type of
customer, with a specific payment need and created a value proposition
that resonated across the payment value chain.



"The payments sector is turning heads," says Paul Mee, coauthor of
the report. "It is growing dramatically and undergoing radical change
across multiple markets and dimensions. Payments represent a relatively
low capital intensity, lower risk annuity business—accessible to anyone
with customer insight, confidence, and the right capabilities."



"To focus on a winning solution, the best way forward now is to spot
frictions in a particular payment flow, geography, or customer group
and to develop tailored payment propositions to remove those
frictions," adds Zilvinas Bareisis, coauthor of the report.






This 32-page report contains 13 exhibits. A table of contents for this report is available online.










Members of Celent's Retail and Business Banking and Corporate Banking research services can download the report electronically by clicking the icon to the left. Non-members should contact info@celent.com for more information.

 

About Celent

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally experienced analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is part of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

New York - Dana Lautin

dlautin@celent.com

Tel.: +1 646 364 8254



Paris - Alexandra Vouge

avouge@celent.com

Tel.: +33.1.73.04.46.26



Tokyo - Yumi Nagaoka

ynagaoka@celent.com

Tel.: +81.3.3596.0020

Internet slowly wakes up to PayPal's quiet fee hike

PayPal made some policy changes in June, but it's likely that you haven't heard much about them until very recently. That's because the company quietly slid in extra fees that will affect nearly all users but failed to be transparent about the changes. Now, the Internet is slowly discovering what happened, and no one is happy about it.

PayPal has generated its fair share of controversies over the years, but it has begun to stir up another one by adding new transaction fees that affect all customers—without telling anyone about them. The company slipped the fees in with a more general update to its "send money" service in June, but because the changes were so well hidden, the Internet has been slow to wake up to what amounts to a good increase in PayPal's income.

Under the previous system, fees were charged based on the type of account the receiver was using as well as where the money was coming from. If the receiver was a premium or business account owner, he or she was charged 30¢ plus 2.9 percent of the transaction—the same applied to all accounts if the money was coming from a credit or debit card instead of a PayPal balance or directly from a bank account. People using personal accounts could make all these payments to anyone else for free.

In June, PayPal made a number of changes to its User Agreement and posted an update to the PayPal Blog. At that time, director of product marketing Heinz Waelchli wrote that PayPal had now begun allowing those with business and premium accounts to make personal transfers to friends and family for free. This, in itself, is a welcome update—I use my PayPal account to receive payments for items I sell on Etsy, but now I can send money to my brother from the same account without either of us having to give PayPal a cut.

What PayPal failed to do was inform users of the fact that any transfer having to do with goods or services will be charged the 3¢ + 2.9 percent fee no matter who or where it's coming from. This includes payments sent from personal accounts as well as payments made after someone has sent you a request for payment (even if that request has nothing to do with goods or services).

Continue Reading at ARS Technica

eMarketer Revises US Retail eCommerce Growth Forecast

Retail E-Commerce Continues Slow Slide AUGUST 21, 2009

Consumer spending recovery lags

eMarketer has revised its forecast of US retail e-commerce sales growth after a lackluster first half of 2009. Retail e-commerce sales, excluding travel, are expected to contract by 3.1% this year.

Growth will resume in 2010, at 5.5%, as consumer spending recovers from the recession. By 2011, eMarketer expects pent-up demand to accelerate growth, peaking in 2012. Retail e-commerce sales will continue to increase, but the rate of growth will fall off in 2013, continuing the pre-recession trend of strong but slowing growth.

Previously, eMarketer projected flat growth for retail e-commerce, expecting declines in the first half of the year followed by second-half recovery. But August figures from the US Department of Commerce (DOC) show sales decreased more than expected in Q2, falling 4.5% year over year to $30.77 billion.

”While many economists see signs of an economic recovery, consumer spending online and offline is still in the doldrums, as evidenced by poor back-to-school sales,” said Jeffrey Grau, eMarketer senior analyst.

According to comScore, US retail e-commerce sales declined by 1% year over year in Q2 2009, after a stagnant Q1.

“DOC retail e-commerce sales estimates have historically validated comScore’s sales figures,” noted Mr. Grau. “However, for Q2 2009, comScore reports a less severe—yet nevertheless dismaying—sales contraction.”

“The marginally negative growth in Q2, on the heels of flat growth in Q1, signals that online retail spending has yet to turn the corner after a disappointing end to last year,” said comScore chairman Gian Fulgoni in a statement.

“Unfortunately, it appears that the reality of nearly 10-percent unemployment and rising gas prices, coupled with an increased savings rate, continues to hold down consumers’ discretionary spending,” added Mr. Fulgoni. “It may still take some time to dig our way out of this recession.”

Keep up on the latest digital trends. Learn more about an eMarketer Total Access subscription, today.

Mercator Examines Changes in Acquiring Market

Merator Advisory Group's (http://mercatoradvisorygroup.com/ ) annual report on the merchant acquiring industry in the United States is now in its third year. While developments in this market unfold at a surprising pace, the old cliche about "the more things change" has never rung so true. Accelerating change seems to be the new constant.

In our first two years doing the acquiring market overview, we identified and delineated trends in the space that have accelerated and, in some cases, have come to their full fruition. Notable among the topics we've analyzed and discussed in reports, as well as in advisory sessions with our clients, has been growing competition for merchant customers between banks and non-banks (ISOs), and the seeming push on the part of banks to "reintermediate" themselves in the merchant card acceptance value chain in a more significant way. Value-added services and technology continue to play a larger role as the commoditization of payment processing services truly begins to hit home for acquirers. The evolving scope of PCI is also fresh in the minds of our clients and other participants in the space as the industry saw the announcement of two major breaches of payment card information at payment processors over the last year.

Last year's report predicted a perfect storm converging on the acquiring space that would significantly alter the industry landscape. Many of the same issues are still brewing - a still-foundering economy and lingering recession, new laws regulating the payments space, and another round of pending legislation targeting interchange and the cost associated with merchant card acceptance being chief among them. The third key issue that we identified last year, however - dissolution of the largest acquiring operation in the world - has evolved into a new instance of market consolidation with the announcement of a different joint venture between two of the top 3 acquirers in the US market. The space has been ripe for consolidation over the past few years, and the economy and the other market forces we've alluded to have pressed the issue.

As merchant acquiring faces its existential crisis, the question of what it truly means to be a merchant acquirer naturally arises. In this year's report, we update our discussion of the various basic business models used by acquirers and other participants on the merchant side of the payments value chain to go to market in the US, and increasingly in other parts of the world. We also examine updated industry data concerning the market performance of the top players in the space and we make projections about how these players might stack up in the years ahead. Finally, we further explore the impact and potential impact of some of the secular trends within Payments and their effect on the acquiring business in particular, now and in the future.

"The economic downturn was the single biggest determining factor in the various performance records of the nation's largest acquirers in 2008. Merchant attrition and declining volume growth due to reduced consumer spending both had a large impact on merchant acquirers' business," comments David Fish, Senior Analyst in Mercator Advisory Group's Credit Advisory Service and author of the report. "As we consider the merchant acquiring space currently, and where it might be headed, we need to take into account many of the trends and the market events that stand to have a broad impact, either as catalysts or symptoms of these trends. Whether the issues at hand are a root cause of market dynamics or the result of them, change is happening in the space either way. Fortunately, the acquiring side of the payment chain has a long history of fighting tooth and nail for its slice of the action."

Report Highlights Include:

Change is the new constant in the US merchant acquiring space, with the pace accelerating as pressure from market forces intensifies.

However, the forces impacting the domestic acquiring market remain largely the same. Acquirers have been adapting to the new normal in a variety of ways.

We provide an expanded taxonomy of the 7 basic business models acquirers use to further clarify what it means to be an acquirer.

Market data covering the top 10 US acquirers is delineated and analyzed, and our projections for acquired bankcard volume suggest a very different landscape within five years.

The market is poised to continue a trend of consolidation, driven by the economy, new complexities arising from data security issues, and increasing competition between banks and non-banks.

This report contains 29 pages and 11 exhibits

Companies Mentioned in This Report:

Advent International; Alliance Data; American Express; Banc of America Merchant Services; Chase Paymentech; Citi Merchant Services; Discover; Elavon; Fifth Third Processing; First Data; First National Merchant Solutions; Global Payments (GPN); Heartland Payment Systems (HPY); Intuit Payment Solutions; Kohlberg, Kravis & Roberts (KKR); MasterCard; Moneris; National Processing Corp. (NPC); Network Solutions; RBS WorldPay; SunTrust Merchant Services; TSYS; Visa; Wells Fargo Merchant Services.

Members of Mercator Advisory Group have access to these reports as well as the upcoming research for the year ahead, presentations, analyst access, and other membership benefits. Please visit us online at http://www.mercatoradvisorygroup.com.

For more information and media inquiries, please call Mercator Advisory Group's main line: 781-419-1700.

Mercator Advisory Group is the leading independent research and advisory services firm exclusively focused on the payments and banking industries. We deliver pragmatic and timely research and advice designed to help our clients uncover the most lucrative opportunities to maximize revenue growth and contain costs. Our clients range from the world's largest payment issuers, acquirers, processors, merchants and associations to leading technology providers and investors.

Source: Company press release.