By: Dan Frechtling, SVP of Marketing and Chief Product Officer
Consumer card transactions overtook cash payments for the first time in 2016, according to Euromonitor. Moving away from cash and checks is a signal of modernizing economies, more efficiency and less fraud — in a conventional sense. But as card payments grow, so do card crimes.
In part one, we looked one driver of increased non-cash transactions, e-commerce growth. In part two, we examined nonbank aggregators. In part three, we consider alternative online and mobile payments. With good news comes some bad news. For all the positive economic velocity that comes from expansion of electronic payments, there is drag as well.
Figure 1: Growth drivers of card payments. 2011 – 2015 data courtesy of CapGemini
Driver #3: The rise and rise of alternative online and mobile payments
Card payments grow through direct use by consumers and businesses. They also grow from indirect use as alternative online and mobile payment vendors embed card payments into their e-wallets. A number of countries have home-grown champions, such as Yandex.Money and QIWI of Russia, Alipay and WeChat of China, PayPal of the US, and Paytm of India. Collectively, these companies have been cited as further examples of the pervasive and disruptive impact of fintech. Yet as these champions compete domestically and multi-nationally, they have partnered with card networks to access their large installed bases.
In the US, Early Warning Services’ clearXchange platform announced Visa and Mastercard debit cards could be used with transactions. ClearXchange saw opportunity in Visa Direct’s 200 million debit cards and the Mastercard Send’s 97% reach of all US debit card accounts. Both clearXchange real-time transactions and Zelle, a P2P service competing with Paypal, benefit from the partnership. Not to be left behind, Paypal allied with MasterCard, Visa and China UnionPay — despite facing higher interchange than ACH — largely to increase Paypal’s presence at point-of-sale.
In Russia, the major card networks increased their participation with wallets as well. Yandex.Money partnered Visa and MasterCard. Qiwi, which allows customers to make payments through prepaid accounts online and at kiosks and terminals, partnered with Visa to create the Visa QIWI Wallet (enables contactless payments). This partnership is notable in light of Russia having the most active number of e-wallet users of any country in the world, according to Datamonitor.
In India, Paytm’s e-wallet was the initial beneficiary of de-monetization and the ensuing migration from cash. Within a few days, Paytm then released a feature for its mobile wallet app to allow shopkeepers to accept payments via credit cards and debit cards. This not only expanded Paytm’s services, it also eliminated the need for point-of-sale (POS) terminals.
Generally speaking, mobile wallets have become so intertwined with card rails that they have become synonymous with storing consumers’ plastic cards electronically. In developed markets, linking debit or credit cards is so natural for consumers that they assume this is simply how e-wallets work. This is the good news for card payments.
Then there is the bad news. Fraudsters are also rallying around card payments, especially in card-not-present (CNP) environments like e-commerce as EMV implementation better insulates card-present (CP) usage. Many countries, including the UK, Australia, and Canada saw CNP fraud rise after EMV. The extra protections for CP payments have merely shifted perpetrators’ targets — an phenomenon that has been called “squeezing the balloon.”
In response, the Consumer Financial Protection Bureau (CFPB) in the US laid out protections that apply to digital and mobile wallets. The rules increase protections for lost or stolen credentials and require firms to thoroughly investigate any reported errors from consumers. The regulations take effect October 2017.
Implication: regulators and law enforcement expect alternative payment and mobile wallet providers to provide protections similar to credit and debit cards. This helps guard against consumer-based fraud such as identify theft and merchant fraud such as deceptive products (see Figure 2).
We’ve seen how card payments and e-commerce grow together, in a symbiotic way. But card payments and card fraud also grow together, in a parasitic way. E-commerce is convenient for both legitimate and illegitimate business like narcotics, human trafficking, counterfeit goods, and gambling. The ease with which new merchants have set up storefronts online is matched by the ease with which fraud perpetrators have instigated mischief and crime. New forms of “nonbanks” add new links in the payments chain and new conveniences to merchants. But as the saying goes: a chain is only as safe as its weakest link.
New forms of digital payments have attracted adoption by consumers and businesses. But fraudsters have been drawn in as well, like insects drawn to light. New players like Payment Facilitators, ISVs, marketplaces, e-wallets, mobile payments and others like them will find risk, compliance and crime prevention to be central to their success.
Noncash payments are growing briskly around the globe. Noncash transactions 2011-2014 rose over 8% CAGR, according to CapGemini. The estimate for 2014-2015 was over 10%. We’ve reached this inflection point as a result of steady gains cards have made over cash in the past 20 years. The fraud and compliance community wants ensure the industry grows while staying free of harm — in other words, making sure this this inflection point does not become an infection point.
To learn more about this trend, check out our “Threats and Trends Dominating Risk and Compliance in 2016: A Year in Review“ webinar recording. You can access the recording here.