Not all financial innovation is scary. No, seriously. Consider, for instance, the exciting technological advancement going on in the way that we pay for things -- whether in person, online, or through our mobile devices.
Recently, The Motley Fool's Matt Koppenheffer interviewed Jason Oxman, the CEO of the Electronic Transactions Association, at the ETA Transact 14 conference. Oxman has a great vantage point thanks to decades of experience through positions in industry associations, companies, and government regulators.
In this interview, Oxman offers his insights about the payments technology industry as it stands today and where it's headed. Among other topics, Koppenheffer and Oxman discuss the implications of mobile payments and other alternative payment technologies, the payments climate outside of the U.S., and security concerns over recent high-profile breaches.
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Matt Koppenheffer: Hey, folks, Matt Koppenheffer here. I'm here with Jason Oxman, the head of Electronic Transactions Association. We're here this week at the ETA Transact 2014 conference. Jason, we've just been hearing so much interesting stuff from all these great speakers and panelists so far.
Let me start you off with what I think is a tough one, but a very interesting question to me: credit cards versus alternative payments. When we think about the future of payment technology, how do you see that shaking out? Is there a partnership, or does one win out over the other?
Jason Oxman: The great thing, Matt, about the industry is that we are in a period of unbelievable innovation. When we talk about the "credit card industry," it has the word "card" in it because, for the last 40 years, consumers have been using the plastic card.
But we're in a period of innovation where we're moving to mobile payments, we're moving to more interesting and dynamic form factors for initiating a payments transaction.
But whatever the means that a consumer uses to initiate that transaction, whether it's the plastic card or the phone, what's most important for consumers and for merchants is the transaction be safe, reliable, secure. All of that goes into the confidence the consumers have in the U.S. to using those "cards," as it were.
Consumers in the U.S. carry one billion credit and debit cards in their wallets.
Koppenheffer: Not all at once!
Oxman: Not all at once, right.
Our industry processed $4.9 trillion worth of transactions last year, so clearly this is American consumers' preferred way to pay.
Koppenheffer: That's U.S., or globally?
Oxman: That's U.S. -- $4.9 trillion in the U.S.
There are 8 million merchants in the U.S. that accept credit and debit cards -- again, because it's consumers' preferred method of payment. So, when I hear people talk about alternative payments -- bitcoin, dogecoin, whatever is out there -- those are all very interesting currencies, if you will, and it's very easy for people to use those alternative forms of payment.
But they don't replace, necessarily, what we're used to; the safety, the reliability, the convenience, the ubiquity of acceptance that we've come to see with the payments networks that have been so robustly deployed around the world over the last 40 years.
Koppenheffer: When you hear "alternative payment technologies," does something like PayPal fit into there, or is it some gray area in between?
Oxman: PayPal is a great example of a true innovator in the payments space. They have been around for a long time. They're not a new company. They've been around for more than a decade, and they have just brought an incredible amount of innovation; first online, then to mobile, even into the retail space today.
Whenever I go to Home Depot, I pay with PayPal, because I can do it right by entering my phone number.
Koppenheffer: You can do that on Uber now.
Oxman: You know what it is? It's a hands-free mobile payment. I can just type in my phone number -- I don't even need to pull out my phone in order to pay at the point of sale with PayPal.
So, an enormously innovative -- and disruptively innovative; they are really changing the way payments are made in this country, and I think PayPal is a great example of that. I think of PayPal as -- and I think it's great to think of them as -- an alternative provider, because they are so disruptive.
But at the same time, when you make a PayPal transaction, you've got the guarantee behind you of not only PayPal itself, which makes some guarantees to protect consumers and merchants, but also if your PayPal account is attached to your credit card -- it's funded by a credit card -- you've got all the protections of the credit card network as well, so there are a lot of layers of protection there.
Again, we can call that "alternative," because it's a new technology and it's very cool what they're doing, but it's still important to remember that those protections need to be there for consumers.
Koppenheffer: You mentioned mobile payments in your introduction remarks this morning. I think you referred to the fact that people are looking at mobile payments and saying, "It's not moving ahead as fast as it should. It's too fragmented." But you were more optimistic about it, and seemed to think that mobile payments are making good inroads, are making good progress.
I think one of the big questions I have is, does that stay fragmented, or does collaboration happen, where we end up with one shared standard or something like that? Or do we continue to see a Google over here, Starbucks doing its thing over here, LevelUp over here, and have that fragmentation?
Oxman: You mentioned companies that are pursuing very different business plans, depending on what type of technology they use to implement mobile payments -- whether it's a 2D barcode, or a 3D barcode, or an NFC chip -- there are a lot of different technologies out there.
But as you noted, my view is that that level of innovation, taking place across multiple platforms, is a very good thing. I do think there are naysayers out there, who say there are too many different pathways, too many different companies deploying too many different technologies, and that's why mobile payments won't work.
I think it's exactly the opposite. I think that's exactly why mobile payments ...
Koppenheffer: Because there are so many out there.
Oxman: That's exactly right. Consumers need to see the technology that works for them. Merchants need to see the technology. It's easy to forget that merchants need to make it as an investment. They need to invest in point of sale equipment to accept mobile payments, and they want to see what their customers are going to be demanding that they use.
I do think all the different technologies out there, not everybody's going to win. There is going to be some inevitable shakeout in the types of technologies that are being deployed.
There are a lot of open questions -- what's Apple going to do? Is Apple going to put an NFC chip in their iPhone 6? If they do, obviously that will be a huge boost for NFC deployment. You've got the mobile network operators who are interested in payments, AT&T and Verizon and T-Mobile, which have partnered on ISIS, which is an NFC deployment.
You noted Starbucks, which is currently the most successful mobile payments platform ...
Koppenheffer: Incredible right?
Oxman: It's a coffee shop! And yet, they have the most widely used mobile payments app.
Now, for them, it's a little easier to deploy because they're a closed-loop system. You can't use the Starbucks app to pay anywhere other than at Starbucks. It's a little harder to deploy something ubiquitous that you can use at 8 million merchants in the U.S., as opposed to just one -- but the model obviously works.
Starbucks has announced that they're processing more than 10% of their revenue on the Starbucks app, and one of the reasons people like it is because it tracks your stars -- it tracks the number of drinks that you've purchased.
Koppenheffer: They love to gamify things.
Oxman: That's exactly right. It works out well; I don't have to carry the plastic card around to get it punched when I buy my coffee. That works very well.
Again, consumers will look at the different technologies out there and say, "I want something that's going to track my loyalty offers." "I want something that's going to give me location-based offers, based on where I am." My phone knows that I'm walking by my favorite store; maybe I'll get an offer for a coupon that's good for the next two hours at that store. That's something that my phone can enable, and maybe that's what I'm looking for in a mobile payments implementation.
But I think the technology diversification will be what drives additional adoption.
Koppenheffer: One of the keynotes this morning, which I thought was just great, was from Ariel Barden, from Google; certainly one of the central players in the mobile payments revolution, you might say.
One of the things that really jumped out at me in his keynote was, he said that in terms of making money from this, they're not really worried about that at this point. They want to get it right for their partners, they want to get it right for their consumers.
From your position, you're optimistic on mobile payments. You're central in this whole mobile payments technology -- that's got to be so exciting, to hear a company like that say, "We just want to get this right."
Oxman: It's very exciting, and what I think is interesting about Ariel's keynote this morning and Google's approach to payments is, it recognizes that payments is a part of a commercial transaction, and not the transaction itself.
I think for most of the history of the payments industry, the payment piece itself has been the most important thing that our industry has offered; the ability to process the transaction, to make the payment.
But what Ariel Barden talked about this morning, and what Google is implementing, is the idea that payments is a part of a broader relationship with the customer. Obviously, the payment is important because the merchant wants to get paid for the product or service that they're offering.
Koppenheffer: That doesn't hurt!
Oxman: But, combining that payment piece with more, with the kind of things we were talking about before -- the loyalty, the location-based offers, the coupons, the things that will maintain, cement, and solidify the relationship with the customer -- that becomes a more interesting transaction for the merchant.
And, it's less important to the provider of that transaction that the payment piece itself generate revenue, because from Google's perspective maybe it's something related to other services that Google offers along with the payment that make it a more valuable transaction for Google.
Koppenheffer: Bring them into that whole ecosystem.
Oxman: But the kernel of that, what drives it for the merchant, is that payments piece.
I think we're seeing that theme here at the Transact show, overall. As you walk the show floor, you'll no doubt see payment companies and technology companies partnering together to make that value proposition offer to merchants and to consumers, to drive this kind of adoption. So, it is a very exciting development.
Koppenheffer: It's actually interesting you point that out. We were just on the show floor, talking to some of the folks from Ingenico.
I think a lot of consumers may see the Ingenico swipe device when they're checking out, but what they were talking about is that whole solution system. You get the customer information up into the cloud, you get the ability for the merchant to be able to view all of that, to be able to act on all of that, create a richer experience for the customer.
Obviously, that's more of a value proposition for somebody like Ingenico to offer to a merchant.
Oxman: That's exactly right, and it also makes the merchant more of a long-lasting customer.
We're in the midst of an incredible technological revolution in payments right now, where those swipe terminals that you were talking about before -- for Ingenico or VeriFone, or any of the other companies that make them -- they used to be just a swipe terminal, just a means of reading the magnetic stripe on the plastic card.
But now, as you note, those terminals can do a lot more. They can accept PayPal, they can read electronic offers that have been transmitted to the customer, they can collect information about consumers.
There's a lot more that those terminals can do, and those terminals are more than just for processing the payment; they're the point of interface with the customer, so that's a great development too, for the equipment manufacturers in particular.
I've sat in on a couple of panels on-going international with payments. One in particular, Discover hosted a panel, and I think one of the challenges going forward, it sounds like, is for people in the payments technology industry to understand the different cultures abroad, and to understand the regulations abroad, to be able to really break into these different areas.
I think sometimes, for investors -- because that's who we're talking to a lot -- there's sort of a flipped notion of, "Oh, well, Visa can continue to grow internationally. Discover can grow internationally."
But it's not as easy as that, because there are so many barriers, sometimes, to being able to get that growth. How does this get addressed in the coming years?
Oxman: I think it's very interesting, the idea of international growth, because of course the market is very mature here in the U.S. Any merchant that wants to accept electronic payments will have an option for doing so, here in the U.S.
But outside of the U.S., it's not so robustly competitive a marketplace and there are many merchants who don't have access to forms of electronic payment. Payments is a very heavily regulated industry in the U.S., and around the world so, as you noted, it's hard to run a payments network. It's not as easy as deploying a network, particularly one with a global reach.
You mentioned Discover, in the context of the conversation about international deployment. One thing that's very interesting and, I think, unique about Discover, is Discover offers its network on a wholesale basis to companies that are looking to expand internationally.
They will white-label their network, effectively, and they have some very unique global partnerships.
Koppenheffer: UnionPay, for instance, which is one that they were talking about, which is really cool.
Oxman: UnionPay is a great example because obviously they're a large, sophisticated company, but they want to provide the opportunity for Chinese tourists who are visiting the U.S. to be able to use their UnionPay cards, so if you see a UnionPay logo on a store here in the U.S., that's right on the Discover network, when you swipe your UnionPay card. Similarly, Discover customers can use UnionPay's network when they're visiting China.
They've done a lot of unique programs like that. On the technology side, they have a great partnership with PayPal. The PayPal transmission, when you pay with PayPal at a brick and mortar retailer, that's over the Discover network.
That's the kind of partnerships that we're seeing, and that's the way in which companies are answering the very important question that you raised, which is, how do you even begin to deploy the infrastructure to expand outside of the United States? Well, you do it with a partner who's already done it.
Koppenheffer: Okay, so part of the answer is partnering, and getting creative -- just probably in general -- is a big part of the answer.
One of the things that I've heard as well is the market in the U.S. -- and I'm learning a lot while I'm here, in addition to what I already know -- but the independent sales organizations; the folks that go out and acquire merchants, who aren't running a processing network, that aren't Visa, that aren't MasterCard, that's very prevalent, that's very big here in the U.S. But most of the acquisitions overseas happen through banks.
Koppenheffer: It sounds like that's starting to change, maybe a little bit in Europe before everywhere else. Is that one of the triggers that will increase international adoption, having more ISOs overseas as well?
Oxman: Yes, I think the ISO market, which has grown up and is very mature here in the U.S., is the reason that credit card acceptance is so ubiquitous here in the U.S.
You noted Visa and MasterCard, for example; they operate networks. They are not card issuers, and they do not acquire merchants. They are the network operator, so they do not have direct relationships with the 8 million merchants in the U.S. who accept electronic payments.
It's the ISOs that have those relationships, and there are a large numbers of ISOs in the U.S., many of whom are members of ETA -- we are the ISO trade association, so we represent the ISO industry -- and that ubiquity of ISOs here in the U.S. is why merchants have access to those payment networks.
As you noted, outside of the U.S., ISOs are very rare and, in fact, the way most credit card markets -- in Europe, for example -- grew up was with those state-sponsored, or state-owned, or state-endorsed banks that actually act as the acquirer for merchants, giving merchants access.
In a country that may have, certainly, not as many merchants as there are in the U.S., but may have hundreds of thousands or millions of merchants, the banks don't have the resources to provide service to each of them, so ISOs partnering with financial institutions in Europe ...
We've seen some great companies; EVO is a great company, a New York-based company which is expanding globally, particularly aggressive in Europe because of the opportunity for ISOs to partner with financial institutions and provide service to merchants in Europe, to give them the access they don't currently have to the payment networks.
Koppenheffer: Closing out, let's finish off with, what's one thing that you're the most excited about in the industry over the next five years, and maybe one of the biggest challenges for the industry over the next five years -- and let's flip it, just so we end on an optimistic note!
Oxman: OK. I think one of the biggest challenges for the industry in the next five years is ensuring that consumers remain confident in the use of electronic payments.
There's been a lot of noise lately about data breaches and protection of information at retailers. There have been a number of high-profile retailer breaches in recent months, and of course there's always the fear that there will be more, because there are sophisticated global criminals who are constantly seeking out fraudulent benefits of their labor.
The concern, I think, for the industry is not that the payments networks are insecure; payment systems are very secure, and the breaches of the retailers have been breaches of the retailers' own systems.
The question is, can we all work together across industries to deploy the type of technical solutions we need to deploy, like end-to-end encryption, to make sure that retailer systems are encrypted, as well as the payment networks.
Tokenization, to protect payment data online and with mobile devices, so that consumers remain confident in using electronic payments when they shop at retail -- that will be good for everybody. That's the challenge.
The biggest opportunity I see for the next five years is the migration to mobile. No question about it for our industry, this is the most significant technological change in our industry in 40 years, since the mag stripe was first deployed.
That migration to mobile really opens up huge new opportunities for our industry to move beyond payments viewed as a commodity, and more as payments viewed as the most vital component of a commercial transaction that takes pace online, in brick and mortar, on the phone, on the tablet -- wherever it is.
That, I think, is a huge opportunity for our industry.
Koppenheffer: Great. Jason, thank you so much for joining me. I've got to say, that is a fantastic bow tie.
Oxman: I would say exactly the same to you! This is definitely the most sartorially impressive interview that's taken place on the show, thus far.
Koppenheffer: Thank you very much.
Oxman: Thanks for being here at Transact.
Koppenheffer: Take care.