Technology the Key to Cards Processing Flexibility

In a supplement to Cards International magazine, Sergio Bordoni, director of the CSC Cards Competency Centre in Milan, Italy, discussed advancements in the global bank cards processing industry.

Q: What lessons have cards processors learned from the global EMV migration?

A: One thing that processors have learned from EMV migration is that it is extremely complex — both technically and strategically. The co-existence of magnetic stripe and chip compounds the problem. Benefits can be realized from proactive and early migration to EMV. Instead of viewing EMV migration as a necessary evil, much can be gained from EMV including market differentiation, increased process efficiencies, reduced fraud and a greater market reputation. A lot of energy and attention should be focused on the migration strategy, especially the rollout approaches to get the most “bang.”

Q: How are processors in Europe preparing for the Single Euro Payments Area, and what changes will it bring about in the processing industry?

Sergio Bordoni,
CSC Cards Competency Centre

A: The most important impact for cards organizations of SEPA will be downward pressure on fees since payments in the Euro zone will be treated as a domestic payment. This means that cross-border ATM surcharges will disappear. To maintain income, issuers and acquirers will be forced to find the absolute lowest cost per transaction or exit the business, furthering consolidation. Cross-border issuing will continue to intensify competition. Incentive schemes, such as loyalty and cash back traditionally funded by merchant discount/interchange, also will be cut, as evidenced by the scaling back of benefits and withdrawal of several new card products.

Q: How are processors preparing for the growing popularity of new payment methods such as prepaid cards, contactless payments and mobile payments?

A: New payment mechanisms are emerging so quickly that most processors are challenged to keep pace with the market. And to compound the problem, oftentimes the processors’ card management platforms are already stretched, adding to the complexity to support these new payment mechanisms. Processors that embrace technology and have a flexible processing platform will be the winners as global payments become more sophisticated.

Q: Will the trend of consolidation within the processing industry continue over the next few years?

A: Consolidation will continue to dominate, as each processor strives to get bigger and bigger to ensure its future and achieve scale economies. Domestic debit programs still continue to create barriers to entry. SEPA and cross-border processing are also impacting consolidation. Consequently, technology will play a critical role, as processors reinvent their models to survive. Processors that implement flexible card processing platforms and related new card technologies will definitely end up on top. These same issues also hold true for processors eyeing other regions around the globe for growth. Technology will be at the forefront of these processors’ ability to dominate.

Q: What are the challenges and opportunities for processors in emerging markets such as China and Eastern Europe?

A: Both markets represent opportunities for growth that are exhausted in more mature market regions. Processors face new challenges and complexities including support for more languages and unique cultural preferences. Business requirements and network integration will stretch the flexibility of some processors’ systems. Regulators may prohibit the fee and interest regimes that sustained the cards industry through its first periods of growth. There is also the challenge of rapidly building up a merchant acquiring infrastructure. Without an established cards infrastructure, a new payment method could always emerge, especially in China, and eclipse the payment card.

Q: Healthcare debit cards have taken off in the U.S. recently. What other new payment trends are processors noticing and how are they capitalizing on them?

A: Healthcare debit cards including Health Reimbursement Accounts (HRAs) and the Flexible Spend Accounts (FSAs) are forms of prepaid and stored value cards that have taken off in the U.S. Other forms of debit cards present huge opportunities including payroll cards for unbanked workers, Electronic Benefit Transfer (EBT) cards for social and government benefits, and gift cards. Commercial cards, such as purchasing cards and fleet cards, are also taking off to reduce the cash flow timeline and payment transaction costs.

Q: What initiatives are processors undertaking in the area of data security and fraud prevention, given recent headlines about data breaches?

A: Processors are focused on data encryption and reducing the fraud exposure associated with card-not-present sales channels. Networks of organized criminals are attacking merchants with lightning-fast, multi-million dollar strikes. Fortunately, fraud detection software has become much more sophisticated, especially with features such as order screening rules, rule weighting, merchant configurable velocity checks, neural network risk scoring, international IP address location, and automated order review. Behavioral analysis software products also are easing the risk of fraud. Some issuers and processors are also bringing card processing in house for greater control over security and customer data.

Q: What will be the main challenges, trends and opportunities for processors over the next few years?

A: Consolidation will definitely continue. And as competition for growth increases, issuers and acquirers will have more options for processing. Some companies will be positioned to negotiate shorter contracts, greater service agreements, and in some cases, lower costs from processors. Others, especially issuers with scale, will move to in-house cards processing to meet their strategic goals and grow their businesses. These players will realize greater control over costs, products, security and time to market. With a great ability to meet the requirements of the localized markets, many will offer card processing services to smaller banks.

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