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Acquirer Tips for EMV Migration

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The Official Publication of the Electronic Transactions Association | November 2012

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TransacTion trends | November 2012 3

TransacTion The Official Publication of the Electronic Transactions Association Vol. 17 | No. 11

trendscover story12 Go Big or Go Home By Julie Ritzer Ross Some large retailers are replacing traditional POS systems with less expensive mobile devices, while others are embracing self-checkout options. These strategies, as well as clienteling solutions, are intended to simplify the checkout process and capture key customer data.

16 Visa’s Line in the Sand By Tom Goldsmith Visa’s new Merchant Data Secure is generally hailed as “a giant step forward.” But questions about its effect on competition and innovation won’t be answered until the solution takes hold.

FeAtUres

6 Industry News trends, strategies, and news in the payments business and etA member community

8 Risk in Review eMv migration: seven guiding principles for acquirers

20 SPECIAL SERIES Startup Stories: Innovation Lab By John Manasso FreedomPay, which was founded on the concept of stored value, continues to innovate and roll out new products.

12

depArtMeNts23 Ad Index

24 Industry Insider shopKeep pos aims to separate itself from the point-of-sale pack by being both cloud and ipad based.

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4 November 2012 | TransacTion trends

Electronic Transactions Association1101 16th Street NW, Suite 402Washington, DC 20036202/828.2635www.electran.org

ETA CEO Jason OxmanDeputy Director/COO Pamela FurneauxDirector, Education and Professional Development Rori FerensicDirector, Government and Industry Relations Mary Weaver BennettDirector, Membership and Marketing Del Baker Robertson

Transaction TrendsPublishing office: Stratton Publishing & Marketing Inc.5285 Shawnee Road, Suite 510Alexandria, VA 22312703/914.9200

Publisher Debra StrattonAssociate Publisher & Editor Josephine Rossi

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Contributing WritersLia Dangelico, Tom Goldsmith, John Manasso, Phillip M. Miller, Bryan Ochalla, and Julie Ritzer Ross

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Transaction Trends (ISSN 1939-1595) is the official publication, published monthly, of the Electronic Transactions Association, 1101 16th St. N.W., Suite 402, Washington, DC 20036; 800/695-5509 or 202/828-2635; 202/828-2639 fax. Postage paid at Pittsburgh, Pennsylvania, and additional mailing offices. POSTMASTER: Send address changes to the address noted above.

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2012 Planet Group Ad Aggregation Trans Trends 090712.indd 1 9/7/12 8:14 PM

6 November 2012 | TransacTion trends

inDusTrYnews

Google Wallet Tests Micropayments With Web ContentGoogle has an announced an experi-ment to gauge user readiness to pay for premium web content via Google Wallet. Content is offered with an “instant refund” option, which allows users to cancel all charges if the content did not meet their expectations.

The setup appeals to companies look-ing to sell premium content to users for a low price—typically less than $1 per ar-ticle. Publishers such as Peachpit, DK, and Oxford University Press are participating in the experiment.

Walmart and American Express have an-nounced the release of Bluebird, a low-cost prepaid account alternative to debit and checking accounts. Available in more than 4,000 Walmart stores across the Unit-ed States, Bluebird accounts can be funded by payroll direct deposit, remote deposit capture through the Bluebird mobile app, cash reloading at any Walmart register, or linking to a checking, savings, or debit card.

If consumers use direct deposit with their Bluebird accounts, they are granted fee- and surcharge-free access to MoneyPass ATMs.

Built on the American Express Serve platform, the program includes mobile fea-tures such as a digital wallet, mobile app, and account management capabilities. Bluebird went live in October at www.bluebird.com.

Cloud POS is expected to reach nearly $200 billion in gross processed volume in 2017, up from $15 billion in 2012, according to Aite Group.

fast FACT

Walmart, Amex Release Prepaid Account

AROUND THE HORN Suncorp Bank has implemented ACI World-wide’s comprehensive fraud management solution, ACI Proactive Risk Manager 8.0. Atos Worldline has launched an NFC mobile pay-ment application for card issuers worldwide. Elavon announced it will offer its MobileMer-chant POS solution to merchants in Ireland. Daily deal site Groupon launched GrouponPay-ments, a mobile POS service. Heartland Pay-ment Systems has launched Mobuyle, a free app that helps restaurateurs accept and process card payments anywhere inside and outside a restaurant. Impact Payments Recruiting has hired industry veteran Don Smith to lead its new impact advisors team. Layered Tech has launched Layered Tech Cloud Data Center, the next-generation secure, PCI-compliant cloud, and reported that its compliant hosting customers have passed every compliance audit since the introduction of its program Compli-ance Guaranteed. Merchant Warehouse an-nounced its Genius Solution Suite, a product family with mobile payment and mCommerce acceptance solutions. Payment Alliance In-ternational has received a WorldPay US Top Distributor Award. PayTrace announced the roll-out of transaction processing capabilities on the First Data North processing network. SecureNet Payment Systems has named Greg Constantine EVP of client operations. VeriFone Systems Inc. will deploy its latest mobile checkout and multimedia-driven coun-tertop payment solutions at sporting goods retailer The Finish Line Inc. Voltage Security announced that payment processing company Mercury will integrate Voltage SecureData Pay-ments into its solutions.

Advocacy EffortsPart of ETA’s mission to fully serve its members and advance their profession is to provide advocacy on members’ be-half. Here is an update on recent activity:• The ETA Industry Relations Commit-

tee held discussions on the proposed interchange settlement, EMV migra-tion challenges, and industry coor-dination efforts for EMV migration implementation. The committee con-tinues to work on a new ETA policy position on EMV migration and dis-cuss resolutions to key problems.

• The ETA Government Relations Committee held a discussion with the Federal Trade Commission (FTC) to determine how a working rela-tionship between ETA and the FTC may best be developed. The com-mittee also is reviewing the Federal Reserve’s proposal to collect survey information from processors.

• ETA staff continued to conduct a se-ries of meetings on Capitol Hill with congressional aides. In September, meetings were held with various committee and subcommittee staff to discuss ETA, mobile payments, and intellectual property legislation.

For more information on ETA’s public policy activities, contact Mary Bennett at mbennett@electran.org.

New MembersETA is pleased to welcome the following companies to its membership. To inquire about a membership with ETA, please contact Del Baker Robertson, director of membership and marketing, at dbaker@electran.org.

AT&T MobilityAtlanta, GAwww.att.com

The Bancorp BankWilmington, DEwww.thebancorp.com

C-SAMOak Brook Terrace, ILwww.c-sam.com

CloverMountain View, CAwww.clover.com

Computer Services Inc.Valaparaiso, INwww.csiweb.com

Gemaltowww.gemalto.com

Gilbarco Veeder-RootGreensboro, NCwww.gilbarco.com

EricssonPlano, TXwww.ericsson.com

MicrosoftRedmond, WAwww.microsoft.com

MoneyDart Global ServicesWoodbridge, NJwww.usaexchange.com

MovenbankNew York, NYwww.movenbank.com

My Clear Reports LLCWestbury, NYhttp://myclearreports.com

Neustar Inc.Washington, DCwww.neustar.biz

PayairNaples, FLwww.payair.com

T-MobileWashington, DCwww.t-mobile.com

VerizonWashington, DCwww.verizon.net

Vesta Corp.Portland, ORwww.trustvesta.com

NEwS fRom tHE ASSoCIAtIoN

CALENDAR :n 2012 Compliance Day Sheraton DFW Airport Hotel Irving, TX November 13-14, 2012 www.electran.org/content/view/845/530/

n Silicon Valley Day San Francisco, CA November 15, 2012 For details, contact Rori Ferensic, 202/828.2635 x 205 or rferensic@electran.org.

n 2013 Annual Meeting & Expo Ernest N. Morial Convention Center New Orleans, LA April 30-May 2, 2013 www.electran.org/content/view/831/516

TransacTion trends | November 2012 7

8 November 2012 | TransacTion trends

The timeline is in place for EMV migration: Beginning Oct. 1, 2015, issuers or merchants that do not support EMV as-sume liability for counterfeit fraud. (The compliance dead-

line for automated fuel dispensers is two years later, October of 2017.) Of course, preparation for that shift will need to start well before that time. MasterCard, along with Visa, American Express, and Discover, have announced that acquirers, service providers, and subprocessors will be required to have the capability to pro-cess any EMV POS transaction, both contact and contactless, as of April 2013.

Many industry professionals think of the migration as another step in a gradual evolution: First there was the embossed plate pressed against carbon paper, then the magnetic strip, and now the EMV chip. With that in mind, they visualize the transition in terms of a new technology that does essentially the same task. Merchants will have to get new terminals and learn to use them; acquirers will need to ensure that their systems support the technology. The migration will involve some new hardware and some training, but otherwise it should be a fairly straightforward transition. Right?

The truth, however, is that the EMV chip is not simply a new device for doing the same old task. The magnetic strip (like the embossed card before it) is a passive medium for encoding a fixed set of information. Swiping the card simply transfers that informa-tion to the terminal, which in turn sends that information, along with the specifics of the transaction, on to the acquirer. But the EMV chip does not simply store information; it is a microcomputer, capable of doing all sorts of tasks, and it is as far removed from the magnetic strip as a smartphone is from the old rotary version.

This means the interaction between the EMV and the termi-nal will not be limited to that simple one-way transmission of information. Instead, the new technology will make possible a range of services, many yet to be imagined, to benefit consumers, merchants, and all of the other parties in the payment value chain.

To prepare for the transition, here are seven principles for EMV readiness that can help acquirers gain the greatest possible benefit in the most efficient way possible:

1. Check network approvals. Plan ahead for an expan-sive EMV future by making sure that terminals are certified by all payment networks at the beginning of the process. Don’t make the mistake that was made in Canada, where the need for recertification by multiple networks cost several acquirers incremental time and money.

2. Carefully select terminals. EMV technology will offer a wide variety of functions, and different terminals may or may not support particular options as indicated by their Implemen-

tation Conformance Statements. Forward-looking merchants and acquirers will want to ensure that they select the most recently approved terminals to implement.

3. manage terminal updates. The greater flexibility of-fered by EMV technology means that terminals will require more frequent updates as options and applications change, and this will only increase with the growing importance of mobile payments. By investing in an automatic update management system, acquirers can avoid the costly manual updates that were necessary in markets like Canada and Mexico.

4. manage EmV keys. EMV technology allows for an unprec-edented level of security, powered by complex cryptographic keys, with offline PIN authentication as a backup in case of tem-porary communication downtime. The seamless functioning of both online and offline authentication requires key manage-ment support strategy, with appropriate resources and trained staff in place well before they are needed.

5. test diligently. Each terminal model, and each configura-tion, must undergo multiple stages of testing prior to deploy-ment. Some of these will be done as a matter of course: The hardware interface and EMV kernel or software approvals

Preparing for EMV Migration Seven guiding principles of EMV readiness for acquirersBy Phillip M. Miller

ISO COrnerrISK In reVIeW

10 November 2012 | TransacTion trends

should have been received by the vendor, and each payment network makes approval of a terminal contingent on its own specific set of tests. Best practices, however, suggest additional tests that careful acquirers should deploy, as they can make the difference between a smooth and successful EMV adoption and a difficult and more expensive one.

6. Develop an on-boarding process. Different retailers will have different needs when it comes to EMV functions and supporting terminals, but all retailers will need education and support. The acquirer’s readiness to support “integrated mer-chants” not only can reduce the time and expense of the on-boarding process, but it also can enhance the relationship with the merchant. This involves an understanding of the retailer’s needs, and the ability to test, analyze, and respond throughout the implementation process. The initial investment in testing tools will be more than recouped in optimizing the migration.

7. monitor after deployment. No matter how extensive the preliminary testing, there is a possibility that problems of some kind or another will arise in the initial stages of deploy-ment. Through ongoing monitoring, careful analysis, and swift response, acquirers can ensure that these problems do not persist past those initial stages. Monitoring also can be used to identify potential abuses and to provide the basis for more so-phisticated and profitable business practices by the merchant. In doing this, the acquirer can both strengthen the relationship

with the current customers and offer a compelling proposition to retailers that have not yet made the journey to EMV.

Implementing these seven guiding principles is not easy; it requires a number of upfront investments as well as consistent diligence. Acquirers that are able to execute across all stages will find they saved time and money in the migration process, but also that they and their merchant customers are positioned to take the greatest advantage of the opportunities that EMV technology affords. EMV migration is less about a new technology and more about building the foundation for an entirely new way of doing business. And that will be a much more demanding process. TT

Phillip M. Miller is global head, acquiring knowledge center, for MasterCard. Reach him at phillip_miller@mastercard.com.

ISO COrnerrISK In reVIeW

EMV migration is less about a new technology and more about building the foundation for an entirely new way of doing business.

ProcessingNetwork

TheeverywhereProcessingNetworkSM

12 November 2012 | TransacTion trends

[ COVER STORY ]

KE Y NOTES8 The financial incentive for new POS solutions is clear, according to one retailer: The iPod Touch device “fully loaded, fully installed, is about $500, and a register is about $5,000.” Some major retailers are eliminating cash registers altogether.

8 CRM and “clienteling” solutions let retailers quickly capture customer information like demographics and purchasing histories to enhance and facilitate the shopping experience.

8 Omni-channel retailing also is gaining steam: Store associates can tap into a single inventory data repository to find out-of-stock items, arrange for them to be shipped to the shopper’s door or picked up at another store, and be paid for on the spot.

Large retailers embrace technologies that give consumers more control over the purchasing experience and give retailers more insight into consumer preferences

biggo homeor

Earlier this year, Walmart Stores said it was piloting a system that would replace traditional self-checkout technology with iPhone technology. It was big news and indicative of a trend among big retailers to make major technology changes in how customers shop and pay for purchases.

A handful of players are eschewing tethered POS systems entirely and replac-ing the units with mobile devices for transaction processing. Along with Apple, which has executed customer checkout with iPads for some time, some of the trailblazers include the following:• UrbanOutfitters—In September 2012, CIO Calvin Hollinger announced that the

retailer was “out of the register business.” Gradually, over the next few months, Urban Outfitters will equip associates in its 400-plus U.S. stores with Apple iPad and iPod Touch devices to handle all checkout functions.

An out-of-stock application will assist customers in locating and paying for mer-chandise from other stores. “If you come into a store and we don’t have your color or your size, the sales associates can find a color or the size somewhere in the en-terprise,” says Hollinger. “We can print out the closest three stores, but we can also check you out with two or three physical items and fulfill, from somewhere in the enterprise, another item, with one simple transaction.”

By Julie Ritzer Ross

TransacTion trends | November 2012 13

• JCPenney—Last July, the retailer an-nounced its plan to eliminate cashiers and cash registers in all 1,100 of its stores by the end of 2013. Salespeople will use iPad devices to accept pay-ments from shoppers, and self-checkout lanes equipped with iPads also will be implemented. Last summer, sales associ-ates working in JC Penney’s new Levi’s “store-within-a-store” departments be-gan using only mobile POS technology for payment processing.Analysts expect the financial benefits of

eliminating cash registers will spur other large retailers to follow suit, with medium and small retailers likely following in their footsteps. The iPod Touch device “fully loaded, fully installed, is about $500, and a register is about $5,000,” points out Hol-linger. The iPad, which can be mounted on a swivel arm at a cash wrap station, is about $1,000 fully installed.

Bye-Bye Checkout LinesSelf-checkout is taking a new turn in the tier 1 retail space as well, as companies

launch initiatives that let customers exe-cute transactions with their own iPhones. “Some larger merchants are getting rid of the traditional self-checkout lanes because, in many instances, the technology malfunc-tions and slows customers down instead of speeding them through the checkout lanes,” one vendor says. “It appears they see this as a viable alternative.”

Here are some examples:• Apple—Not surprisingly, Apple rolled

out self-checkout functionality in its stores last November. With its Easy Pay application, shoppers can pay for their purchases direct from their own iPhones with no assistance needed from a salesperson. Almost immediately after the launch, skeptics dubbed Easy Pay “Easy Theft,” predicting it would lead to significant problems with inventory shrink. A company spokesperson says that hasn’t been the case.

• Walmart Stores—As discussed, Walmart kicked off a self-checkout pi-lot using the iPhone. Many Walmart locations already have “regular” self-

checkout lanes where customers use traditional barcode scanning hardware and touchscreen kiosks to make pur-chases without cashier intervention, us-ing credit, debit, and EBT cards as well as cash. The new system, called Scan & Go, would let shoppers peruse stores’ aisles, scan individual items with their iPhone, and place them in a shopping bag. A complete list of items would then be presented at the self-checkout coun-ter with the iPhone application, thereby eliminating the need to scan all of the items at the time of checkout.

Hello, CustomizationCustomer relationship management (CRM) and “clienteling” solutions also are emerg-ing. New approaches let retailers quickly capture customer information like demo-graphics, purchasing histories, preferenc-es, and loyalty club participation, as well as digitally harness data from CRM and inventory/product information databases. Combined with other information in retail-ers’ databases—such as data pertaining to complementary merchandise—this infor-mation is then used on the sales floor to provide a higher level of customer service, personalizing store employee/customer interaction.

The driving force behind clienteling so-lutions adoption is the premise that closer relationships with consumers enhance sat-isfaction, allegiance to the merchant and its brand, and lifetime value, suggests Lee Hol-man, lead analyst with retail consulting firm IHL Consulting in Franklin, Tennessee. Larger retailers have more incentive to use clientel-ing solutions: It sharpens their competitive edge against local merchants whose asso-ciates are well-acquainted with customers, address them by name, and are familiar with their preferences, Holman explains.

“Mobile POS technology has become a real staple of many retail and hospital-ity verticals,” he adds. “At the same time, customers want—or, more accurately, de-mand—detailed product information at the point of decision. The more retailers them-selves harness the same mobile devices consumers have come to know—at the POS and to practice CRM in store aisles—the more deeply vested in the brand shop-pers will become.”

A sizable number of clienteling solutions

14 November 2012 | TransacTion trends

[ COVER STORY ]

now feature a mobile POS component, so that store associates can “close” interactions with customers with an actual transaction completed at the point of decision rather than at a fixed checkout counter. Many also support omni-channel retailing, which lets store associates tap into a single inventory data repository to find out-of-stock items, arrange for them to be shipped to the shop-per’s door or picked up at another store, and be paid for on the spot.

Epicor Retail Clienteling, released by Epicor Software earlier this year, and En-gage 2.1, a mobile sales/CRM solution introduced recently by Starmount, are a couple of examples. The Epicor prod-uct runs on tablet devices and allows consumers to enter payment and other information themselves to streamline transactions and bolster accuracy, says Ian Rawlins, vice president of marketing, retail software. Engage 2.1 runs native on Apple iPod Touch, iPhone, iPad, and other mobile devices. It accepts magnetic strip cards and supports chip-and-PIN transac-tions. Engage 2.1 also integrates with the vendor’s Connect open shopper engage-ment platform.

Among the retailers that have migrated to a clienteling solution with mobile pay-ment functionality is Aurora Fashions. This London-based operator of approximately 2,000 apparel stores around the world uses an iPad-based solution that, in addition to enabling associates to process transactions on the store floor, permits them to use their mobile device to accept payments for items that are out of stock in their particu-lar store, but available in another location or from a central warehouse.

“Mobile POS and mobile CRM play a pivotal role in bringing customers closer” to Aurora—the former, by helping to clinch the sale at the true point of decision, and the latter, by minimizing shoppers’ incli-nation to go elsewhere for merchandise that is unavailable in a certain store, says Ish Patel, group omni-channel director. “In a highly competitive and, even more importantly, customer-centric world, if we don’t have what the shopper wants on one store’s rack, the associate needs the tools to locate it at another store or the warehouse and arrange for it to be shipped wherever the shopper wants it to go.”

Go TimeLarge retailers that don’t go with the clien-teling solutions flow will not only be un-able to compete with their smaller coun-terparts, but they also may find themselves at a competitive disadvantage because many smaller merchants fully intend to jump on the bandwagon, says Holman. He notes that 41 percent of small to mid-sized retailers surveyed by IHL Group plan to de-ploy mobile devices this year, and 23 per-cent intend to follow suit next year. They’ll use the devices to engage customers and enhance the store experience. Twenty-five

percent of retailers will leverage tablets and associated solutions for mobile POS and clienteling.

Other retailers are concentrating on solu-tions that support omni-channel retailing by allowing payments to be accepted in one channel (e.g., online) for products picked up or delivered elsewhere (e.g., at a store).

Toys “R” Us is using an omni-channel initiative to facilitate payments across dif-ferent sales segments. A “Ship to Store” component, added this past fall, lets cus-tomers pay for and ship select online pur-chases to local Toys “R” Us or Babies “R” Us stores free of charge. Enhancements to the “Buy Online, Pick Up In Store” program in-clude adding merchandise pick-up kiosks where consumers can retrieve and pay for goods ordered on the retailer’s website.

Other retailers are upping their mo-bile app sophistication in an attempt to better engage customers. Building on its existing mobile strategy, Rite Aid now of-fers a free app that permits members of its wellness+ loyalty program to use Load-2Card functionality to clip coupons virtu-ally and redeem them, along with rewards, by presenting their mobile device at the point of sale. The app also lets customers manage their prescriptions, including co-payments, electronically by scanning the barcodes on prescription bottles with their mobile device.

Big retailers clearly are at the tip of the iceberg in terms of big technology adop-tion. Those that embrace solutions sooner rather than later stand to make the largest gains going forward. TT

Julie Ritzer Ross is a contributing writer to Transaction Trends. Reach her at jritzerross@gmail.com.

The driving force behind clienteling solutions adoption is the premise that closer relationships with consumers enhance satisfaction, allegiance to the merchant and its brand, and lifetime value. —Lee Holman, IHL Consulting

FILE NAMEBILL TO JOB#DESCRIPTIONCLIENTLAST MODIFIEDPREVIOUS USER

7.75” x 10.375”8.25” x 10.875”8.5” x 11.125”None100%NoneNone

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COLORS Cyan Magenta Yellow Black

PUBSTransaction Trends / November 2012 Issue

ROUND #

2

SA:SM: PP:PRF:AD:CW:ACD:ECD:AE:AS:ART:ST:PM:

Sachi UshiharaRyan GraffCarrie MorgensND Koster/Brandon B.Sinan DagliKacey CoburnShahin / EricJohn ButlerColleen ToombsSam BarteloniRebecca LanthorneNoneTracy Urquhart

PRODUCTION NOTE: Background art is FPO and to be replaced at DMAX.Headline and flag to be rendered at DMAX.

Learn more at paywithisis.com or reach us by email at partners@paywithisis.com

Isis Mobile Commerce Platform, Isis Mobile Wallet, Isis Pay Smarter and the associated Isis logos are trademarks of JVL Ventures, LLC.  Contactless Symbol is a trademark of EMVCo, LLC.  © 2012 JVL Ventures, LLC.

The Isis Mobile Commerce PlatformTM offers your merchants the opportunity to build

more customer loyalty, increase customer engagement and mobilize their existing

rewards cards and offers. And with our industry relationships, we’re positioned to provide

you with the innovations that your merchants want today. So why not stay a step ahead?

Reap the benefits of partnering with IsisTM and join us on our mission to be the industry’s

most widely accepted mobile commerce platform.

Isis, Isis Mobile Commerce Platform, Isis Mobile Wallet, Isis Pay Smarter and the associated Isis logos are trademarks of JVL Ventures, LLC.  Contactless Symbol is a trademark of EMVCo, LLC.  © 2012 JVL Ventures, LLC.

The Isis Mobile Commerce PlatformTM offers your merchants the opportunity to build

more customer loyalty, increase customer engagement and mobilize their existing

rewards cards and offers. And with our industry relationships, we’re positioned to provide

you with the innovations that your merchants want today. So why not stay a step ahead?

S:7.75”S:10.375”

T:8.25”T:10.875”

B:8.5”B:11.125”

C19795_2a.indd09.19.2012133 linescreenmf

c19795c02A_3u_simp.psdc19795x02a_opportknocks_3u.tif

16 November 2012 | TransacTion trends

[ FEATURE ]

KE Y NOTES8 Some think Visa’s visibility and familiarity will make its solution the easy choice, but others worry innovation could wither in the wake of Visa’s solution becoming the de facto standard.

8 Visa most likely will offer its solution to processors, gateway operators, and acquirers, and the company has indicated that processors and acquirers may be able to resell the product to merchants.

8 There are too many unanswered questions to determine whether Visa’s entry into the encryption market will be a net plus or minus in terms of competition. The first indications will come when the service is unveiled next year.

The behemoth’s new encryption solution has some wondering if the move will drive out competitors

Visa’s in the SandBy Tom Goldsmith

When Visa Inc. announced in August it would offer a point-to-point (P2P) encryption solution, the immediate reaction seemed to be “great” or “it’s about time.” But given the market power Visa wields, it didn’t take long for questions to arise about the ability of other vendors offering similar solutions to compete with the world’s

dominant card company.In its release announcing the encryption service, Visa said it already was

working with acquirers, processors, and terminal makers to design the system for easy integration into the payments infrastructure, but didn’t address the impact on the existing P2P products available from other vendors, including Trustwave, Voltage Security, Heartland, First Data, and others. But the company later said it didn’t see its service as a direct competitor to those offerings.

For now, that may be true, if only because the market for more widespread encryption is so large.

Payment data that could be used to commit fraud has for a long time been encrypted “at rest”—whenever it is stored in a terminal or on a processor’s computers—but until recently, much of the data “in transit” traveled without the benefit of strong encryption.

That began to change significantly in January 2009, when Heartland Payment Systems discovered that hackers had managed to place a software program inside its processing systems that tapped into data as it was transmitted and recorded sensitive card information, compromising millions of credit card ac-counts. In the wake of the breach, Heartland committed itself to end-to-end encryption, and began urging the industry to adopt the practice.

Later in 2009, Visa took its first high-profile action, issuing best practices guidance for P2P. The PCI Security Standards Council (PCI SSC) also issued guidelines and, though it doesn’t require P2P encryption, the standard does provide for less onerous validation requirements for those who employ it.

Those events, and the lessons learned from Heartland and other breaches,

Line

TransacTion trends | November 2012 17

have created a robust market for encryption products and services, one that’s just get-ting started but potentially worth billions of dollars. And it is that market that Visa’s an-nouncement will affect, for better or worse.

Giant Step ForwardAll of those who spoke to Transaction Trends about the Visa announcement agreed that by making Visa Net encryp-tion friendly, the Visa encryption solution is a giant step forward and long overdue. It will enable P2P encryption throughout the Visa payments network, even for those using a third-party system like Heartland’s or First Data’s.

Competitive concerns fall into two cat-egories. In the first camp are those who think Visa’s brand name visibility and fa-miliarity will make its solution the easy, obvious choice, especially by merchants, who likely aren’t familiar with the idea of encrypted data or perhaps would be sur-prised to learn it’s not already part of the processing system. Those in the second camp worry that in a world in which a Visa encryption solution becomes the de facto standard, innovation could wither and per-haps even better security technology might never come to market.

John Reynolds of Showcase Furniture in Manassas, Virginia, is among those mer-chants who were unaware that the data they transmit probably isn’t encrypted and balked at the idea that the service will carry a price tag, even if it makes PCI com-pliance easier. “We’re paying a significant amount for credit card processing and our processor charges us PCI compliance fees and other fees related to security,” Reynolds says. “I’m not eager to pay anything more, but if I have to pay, then I would probably lean toward something that the credit card company is offering. They have a reason to make sure it works.”

The competitive issues arise when it comes to acquirers, processors, and mer-chants. Visa most likely will offer its solu-tion to processors, gateway operators, and acquirers, and the company has indicated that processors and acquirers may be able to resell the product to merchants. In oth-er words, Visa Merchant Data Secure (the name given the new service) won’t involve Visa competing directly with other encryp-tion vendors, but the service may compete,

How Visa’s Merchant Data Secure P2P Encryption Service WorksIf you’re not a deep-diving security expert, encryption probably is a bit of a mystery. You likely know that encryption scrambles the original data (credit card transaction data) so that it is unintelligible to anyone who can somehow obtain it. That’s true, but making sure the encryption scheme does an effective job of hiding the data, in a way that’s recoverable, is a complex proposition.

In a simplified form, encryption starts with a key, which is used as part of a math-ematical formula, or algorithm, to encrypt the transaction data. In P2P encryption, the data is transmitted in this encrypted form and the receiver uses a key (usually a complimentary key, not the original) to remove the encryption and recover the card transaction data.

While most encryption schemes are difficult to break, the weak points in the system involve the robustness of the algorithm and the secrecy around the keys. If a hacker can easily determine the algorithm using a powerful computer, or if the key is com-promised, the whole scheme falls apart pretty quickly.

The method Visa uses in its encryption service relies on two techniques to ensure its security. The first is Triple DES, an algorithm based on the DES standard developed in 1998, but improved over the years to keep up with increasing computer power. The second is a key management system, Derived Unique Key Per Transaction (DUKPT), which also was created by Visa to manage PIN data in the late 1980s and early 1990s.

Triple DES, as the name implies, follows the DES encryption standard, which is a mathematical formula that, even if a hacker knows the formula, can’t be reversed to recover the data (absent the key). The “Triple” part of the name refers to the fact that the DES algorithm is applied to the data three times, often using three different keys.

The DUKPT key management scheme adds to the security of the transaction. It starts with a single, “super secret” key that’s tightly guarded. From it, a second key is generated and distributed to payment device manufacturers and processors (each manufacturer gets a unique key for a class of devices, while processors get a bank of keys representing all those distributed to the manufacturers). Within the devices, the second key is used to generate a new unique key for each transaction using a process that processors also can perform to determine the appropriate key at the receiving end. Apart from random coincidence, the final keys are not duplicated, so even if one key is compromised, it can be used only on one transaction and is useless for all others.

Visa, terminal manufacturers, and processors have used the combination of Triple DES and DUKPT for more than two decades to protect the four-digit PINs used with credit and debit cards (including EMV cards, presumably). It has proven extremely ef-fective and is well-understood by manufacturers and processors, which should make it fairly simple to apply to card transaction data as well as PINs going forward.

Visa’s in the Sand

18 November 2012 | TransacTion trends

through resellers, with other products al-ready in the market.

Visa seems to be avoiding the appear-ance of trying to dominate the market by offering its P2P encryption through resell-ers, noting that the company could have offered the service at no cost and created an instant standard, says David Fish, an ana-lyst with Boston-based Mercator Advisory Services. Fish counts himself among those who have at least some concern that in-novation could suffer. “Why would an en-trepreneur bring something to market that would take a different approach to security now that Visa has thrown its weight behind a particular approach to encryption of pay-ment data?” he asks.

Looks Like a StandardIntentionally or not, Visa’s Merchant Data Secure does set parameters that bear at least a resemblance to a standard. For ex-ample, the service that is now set to ar-rive early next year will rely on the same Triple Data Encryption Standard (Triple DES) and Derived Unique Key Per Trans-action (DUKPT) key management cur-rently used to encrypt PINs. But that technique relies on a data encryption

algorithm that is nearly 15 years old and now considered secure only because it has been modified to apply three keys to each block of data (the original single DES algorithm became susceptible to attacks as computing power grew over the past decade or more). For the existing payments infrastructure, using the system currently employed to protect PINs is a plus, since it simplifies the updating of many existing merchant terminals.

Of less concern, at least for now, is the possibility that end-to-end encryption will be a requirement, either as one of Visa’s own rules governing use of its cards or through the PCI council. In recent inter-views, Visa’s Eduardo Perez said, “We do not mandate [P2P encryption] or require it at this point. But [it] is one of the tenets of the PCI Data Security Standard.”

And Then There’s EMVFor the long term, Visa’s announcement of the Merchant Data Secure service has to be evaluated in terms of the larger secu-rity picture, and in particular the push by all of the major card companies for adop-tion of EMV standards, which add encryp-tion to the physical credit or debit cards,

as well as the terminal that reads them. When EMV is widely adopted—possibly within two to five years—unencrypted data in transit may be the last major vul-nerability unless in-transit encryption be-comes required, either by card companies or for PCI compliance.

There are too many unanswered ques-tions to determine whether Visa’s entry into the encryption market will be a net plus or minus in terms of competition. The first indications will come when the ser-vice is unveiled next year along with the rumored reseller program. For now, the company appears to be more interested in thwarting card fraud than creating a massive new revenue stream. In fact, by working with acquirers and processors to develop the final specifications for Merchant Data Secure and by making the system flexible enough to accommodate third-party solutions at other points in the data stream, Visa may expand the market and bring new competitors into the mix of available solutions. TT

Tom Goldsmith is a contributing writer to Transaction Trends. Reach him at tom@tomgoldsmith.com.

[ FEATURE ]

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20 November 2012 | TransacTion trends

Startup Stories: FreedomPay»

Tom Durovsik fondly recalls childhood memories of lying on his living room floor and playing with Matchbox cars. In the 1980s, when he worked for the collectibles maker Franklin Mint, eventu-ally becoming president, Durovsik leaned

back on those reminiscences and introduced a line of precision-made, one-to-24 scale automobiles—sort of like Matchboxes for adults.

“They were just hugely successful as collectible items for men,” says Durovsik, now the founder and CEO of Radnor, Pennsylvania-based FreedomPay, whose processing volume is $1 billion annually. “I like to think that when you’re in a toy store like the Franklin Mint and you can think back to childhood and now create things for adults, it’s a huge, fun project as well as a great financial success.”

Durovsik is an entrepreneur with a knack for cre-ating products that find a niche in the marketplace. He did it early in his career at PepsiCo., later at the Franklin Mint, and then again when he founded an early web-based company that provided health-care information called InteliHealth, which was subse-quently purchased by Aetna.

Based on his interest in technology, Durovsik founded FreedomPay in 2000. He wanted to ex-plore the concept of stored value as an alternative to credit cards from a cost and functionality stand-point. FreedomPay was founded with the idea of creating a stored value network, a closed loop for captive environments.

“Today, we’ve grown that into a highly successful business, where we do college campuses, government agencies, Fortune 500 companies, and some of the biggest teach-ing hospitals in the country. We manage all of their payment and voucher systems,” says Durovsik. “We also do their credit card processing. But in the beginning, the company was really founded on strength of stored value.”

FreedomPay CEO has a knack for creating products that work, no matter what merchants need

By John Manasso

FreedomPayRadnor, PAFounded: 2000

Annual processing volume:

$1 billionProcessing power:

2,500 merchants

“We need to be ahead of the

industry and take a leadership role.”

—Tom Durovsik, founder and CEO

Innovation Lab

TransacTion trends | November 2012 21

Good VIBEsFreedomPay handles processing for 2,500 merchants. Some of them, like Case New Holland, the world’s second-largest manu-facturer of construction equipment, have thousands of locations. During the compa-ny’s 12 years, its creative products—such as those FreedomPay offers in stored value—have paved the way.

FreedomPay continues to innovate and roll out new products. Several months ago, it launched its new VIBE platform, roughly four years in the making, which it expects to be important in the company’s future growth. In a news release, FreedomPay describes VIBE as a “cloud-based transac-tion platform” that is “revolutionizing the enterprise processing world.”

The key to VIBE is how it uses mobile phones, which Durovsik believes are the key to the industry’s future. FreedomPay’s Chris Kronenthal, vice president of IT, says one of the goals of VIBE, which he helped to build, is “making very complex things as simple as possible.” Nonetheless, it is de-signed to operate using Visa Level 4 mer-chant compliance data in hundreds of milli-

WORDSTOTHEWISE� Go mobile. “My advice would be to get on board with mobile,” says Tom

Durovsik, CEO of FreedomPay. “I think it’s moving much faster than people understand and it’s going to bring a lot of speed and efficiency to the mer-chant location. It’s going to create deeper relationships with their custom-ers because it’s going to be in real time in their customers’ hands, and they can communicate incentives and messaging whenever they want. I think for merchants who are unaware or hesitating or what have you, it’s a really good time to get involved.”

� Have a “say yes” philosophy. “We always start with yes,” Durovsik says. “That’s just a mentality that I preach corporate-wide here. We don’t like to say no to clients. Sometimes it’s hard to get there, but we like to think we do. And a lot of it is even beyond that because I think customers want more. They typically will come to us and go, ‘Can you do this? Can you do that?’ I think the traditional environment or processor will say, ‘We can’t,’ or, ‘It’s out of our realm.’ What we’ve done is built this very robust platform so when customers come to us and they have something that can even be specific to their business, we’re generally in a situation where we can work with them and find solutions to their business.”

� Make customer service “job one.” FreedomPay likes to “over deliver,” says Durovsik. “We like to take a leadership role in new product solutions. I’d like to think we’re responsible for innovation for our customers.”

Innovation Lab

POS

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22 November 2012 | TransacTion trends

seconds. The first merchant to use VIBE was Companion Baking, a commercial baker that has three locations in the St. Louis area that operate as cafés and offer breakfast.

Andrea Waldin, FreedomPay’s vice president of marketing, de-scribes the user-friendly nature of VIBE for merchants and how they can get added value out of the system: The merchant logs in to the system to create a promotion. It specifies the parameters it wants, whether it’s the hours of the day the merchant wants the promotion available to customers, a specific dollar amount customers must spend, a percentage off, or a fixed number of customers who are eligible for the discount, so that the customer receives the rules that apply. The merchant uploads a graphic with some text, saves it, and then the promotion gets pushed out on the network. The technology also has been created in such a way as to prevent couponing-fraud, potential multiple uses by a single customer, Waldin says.

Consider the example of a breakfast café having the sunk costs of staffing and food and losing business because of a rainstorm, Waldin says. The merchant can counteract the bad weather and lack of business by sending out a coupon for 20 percent off during a specified time to try and drive business.

“That’s really powerful,” she says. “If you think about all of the different service-type industries [with] sunk-cost models, where they don’t really know what hours of the day they want to generate business, it’s very difficult to drive consumer behav-ior with things like printed coupons because they’re not done in real time.”

Kronenthal says one of the advantages of the system was that it was not built for a company with just a few merchant locations, which would mean FreedomPay would then have to scale its system up to use it for larger merchants. Instead, it was built more with the likes of a Case New Holland and its 2,000 locations in mind so that that the system could be scaled down, if need be.

Next Wave FocusedWith such an investment of time to build the technology, pri-vate equity has been part of FreedomPay’s strategy from the beginning. Its board of directors includes Peter Buhl of BlueRun Ventures, Mark Levine of Core Capital Partners, and Jack R. Selby of Clarium Capital Management.

BlueRun’s website says it makes an initial investment be-tween $1 million and $6 million, with additional capital reserved for later rounds. On its website, Core Capital Partners says some of the areas in which it chooses to invest are “infrastructure and applications to support advancing mobile devices, networks, and data usage” along with cyber security and data protection. Clarium was founded by Peter Thiel, a co-founder of PayPal and an early investor in Facebook.

“We have private equity investors and partners over the 10-year course of the life of the company,” Durovsik says. “They’re very involved in and very helpful with strategy and financing.”

Durovsik acknowledges that when FreedomPay began build-ing VIBE four years ago, it made a “big bet” on mobility. “As an entrepreneur, I’ve always felt that we need to be ahead of the industry and take a leadership role,” he says. “I think that’s been

TransacTion trends | November 2012 23

a driving force with us. Mobility was on our radar four or five years ago, certainly as a serious opportunity. We did take a very big investment and a big bet on mobility, and I think we’re very happy we did. I think back then, it wasn’t prime time. I think everyone was saying, ‘Mobile payments, oh, it’s com-ing,’ but it wasn’t really there.

“Today, I’d say we’re officially in the era of mobile incentives and using the mobile platform to really create stronger relation-ships between merchants and customers. So it was a strategic decision. We built something and a platform and an applica-tion on the mobile platform that really is unparalleled now in the industry.”

Durovsik predicts VIBE will become bet-ter known in the marketplace, along with products that come from big-name com-panies such as Google. To that end, Waldin is beginning to ramp up the company’s marketing effort, which extends to the company’s website that was relaunched in September.

FreedomPay is about more than just processing transactions for its customers, says Durovsik. “They’re really coming to an innovation laboratory that heavily focuses

on new products and advancements and enhancements,” he says. “That’s what we like to do: Bring our clients the next wave, what’s hot, what’s coming.” TT

John Manasso is a contributing writer to Transaction Trends. Reach him at john_manasso@yahoo.com.

Company Page Phone Web

Apriva 21 480-421-1275 www.apriva.com

Authorize.Net C2 866-437-0491 www.authorize.net

Elavon 2 678-731-5236 holly.lytle@elavon.com

eProcessing Network, LLC 10 800-296-4810 www.eprocessingnetwork.com

Isis 15 www.paywithisis.com

Merchant Warehouse 11 800-941-6557 www.merchantwarehouse.com

Network Merchants, Inc. 19 800-617-4850 www.nmi.com

North American Bancard 1 855-563-9107 www.nabancard.com

Pax Technology 9 877-859-0099 www.pax.us

Planet Group, Inc. 5 800-979-9166 www.planetgroupinc.com

Total Merchant Services, Inc C4 888-84-TOTAL x9411 www.upfrontandresiduals.com

USA ePay 22 866-872-3729 www.usaepay.com

NPC, a Vantiv company C3 877-453-5933 www.npc.net

ADVERTISERS INDEx

24 November 2012 | TransacTion trends

Of all the things that help differentiate his com-pany’s POS platform from its competitors, Jason Richelson says the most important is that his solu-

tion was created by someone who has “spent a lot of time behind the counter ringing up customers and seeing what happens when the register doesn’t work.”

Nearly as important a differentiator is that ShopKeep POS is both Cloud- and iPad-based. What’s more, Richelson and his colleagues “are here for our customers seven days a week.”

A lot of companies “don’t have the capability of offering the kind of support we offer, because the mod-el just isn’t there to pay for it,” he adds. “They can’t be there for all of their previous customers because they get their money up front and then move on to the next guy.”

Richelson, who owns and oper-ates a pair of wine stores called The Greene Grape as well as a gourmet grocery store called The Greene Grape Provisions in New York City, came up with the idea for Shop-Keep POS nearly four years ago af-ter “getting frustrated with my POS software and the guys who were managing it.”

At the time, “it was hard to get information out of the software be-cause it ran on a server in the base-ment of one of our stores,” recalls Richelson. “When I wanted to see our

sales for the day, for instance, I had to log into the server and run reports. That was really annoying.”

Do-It-Yourself POSAlthough Richelson himself developed a number of work-arounds for that problem, he wasn’t able to do the same when, toward the end of 2008, the aforementioned server crashed, preventing his stores’ cashiers from ringing up sales. Richelson was on vacation at the time, and the people who installed the server wouldn’t come out to fix it for several days. “This kind of thing happened over and over and over again,” he adds.

As a result, Richelson decided to switch his stores to a Cloud-based POS, but couldn’t find one that would work in grocery stores. “So, I decided to do it myself. I came up with the name, bought the domain, hired an engineer, and started building something.”

Richelson launched a PC-based platform in 2010, “but then the iPad came out and I realized that a touch-screen, Windows XP-based system, sold by guys trying to make huge margins, costs $3,000, while an iPad, which is smaller, more powerful, and has a touch-screen and battery back-up built in, costs just $500.” As a result, the entire register portion of ShopKeep POS was rewritten for the iPad in the beginning of 2011.

Since the resulting system, which was tested in Richel-son’s own stores, was added to the Apple App Store last August, the company’s client roster has grown to include almost 3,000 stores—with an additional 50 to 60 joining the fray each day.

Secrets of SuccessWhat is it about ShopKeep POS that’s attracting those merchants?

To begin with, says Richelson, there’s its software, which allows cashiers to ring up sales and more on their snazzy, new iPads. “When you look at it as a retailer, it makes sense. For example, the cash button is really big because 60 to 70 percent of what our customers do is cash. Also, we’ve reduced the number of clicks needed to do certain tasks.”

Clients also enjoy the product’s ease of access: “Our dash-board app allows you to check your sales whenever and wherever you want using your smartphone,” says Richelson, whose company has partnered with Dwolla, LevelUp, and PayPal in the past year. “It also allows you to manage your store from pretty much any location. You can add inventory, you can run sales history, you can run reports—and you can do all of those things without having to buy a server.”

The fact that ShopKeep POS is a “completely open sys-tem” also likely appeals to certain merchants, he adds. “We will work with any ISO and any processor, and we will even-tually work with multiple loyalty providers and multiple delivery systems, too. The goal is to give retailers as many op-tions as possible and help them run a smarter business.” TT

Bryan Ochalla is a contributing writer to Transaction Trends. Reach him at bochalla@yahoo.com.

Industry InsIder

Server-less ServiceShopKeep POS’s Cloud- and iPad-based systems distinguish it from the pack

By Bryan Ochalla

“Our dashboard app allows you to manage your store from pretty much any location … without having to buy a server.”—Jason Richelson

We’re Vantiv.

Dedicated, strategic professionals with 40 years of experience developing innovative payment processing solutions for merchants across the nation. We’ll work with you to develop programs that simplify your payment acceptance strategies, while providing you with new sources of revenue. And we’ll help protect your business with our comprehensive data security and fraud prevention solutions.

Our people, technology, and partnerships are the Vantiv di� erence. Let’s discuss your future success.

Let’s talk payment processing866.622.2833vantiv.com/tt

Expect more.© Copyright 2012 Vantiv, LLC. All rights reserved.

Managing Payments, Driving Solutions

TransactionTrends_7.12.indd 1 7/2/12 1:42 PM

THE MOST IMPORTANT THING TO REMEMBER ISN’T THAT WE WON ETA’S 2012 ISO OF THE YEAR.

IT’S THAT EVERYONE ELSE DIDN’T.

THE MOST IMPORTANT THING TO REMEMBER ISN’T THAT WE WON ETA’S 2012 ISO OF THE YEAR.

IT’S THAT EVERYONE

THE MOST IMPORTANT THING TO REMEMBER ISN’T REMEMBER ISN’T THAT WE WON ETA’S 2012 ISO OF THE

IT’S THAT EVERYONE ELSE DIDN’T.EVERYONE ELSE DIDN’T.

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Join our winning team and our 16 year reputation of creating great experiences for Sales Partners and Customers. We have assembled a New Leadership Team with the experience and vision to secure your long-term success. We won ISO of The Year for a reason. Call us now and fi nd out why.

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TOTAL MERCHANT SERVICES“MOST IMPORTANT”

TRANSACTION TRENDS

PA/AD/CW: MONTY PERAmontypera@mac.com c: 646.510.1005

TRIM: 8.25” X 10.875”BLEED: .125”LIVE: 7.75 X 10.375”

TRIM

BLEED

LIVE