In this holiday month the PCI Data Security Council has taken the opportunity to update guidelines for merchants using Wireless technology to collect payments and also to issue guidelines for the growing number of merchants employing Tokenization.

The Payment Card Industry – Data Security Standards (PCI-DSS) lay down minimum security requirements for all merchants and aim to reduce the level of data breaches where customer card details are stolen. Failure to comply with these standards or incidents leading to data loss can lead to substantial fines and brand damage.
The guidelines are designed to help merchants to interpret the PCI-DSS standards, so are not prescriptive and do not change the Standards. Each merchant must ensure that their individual operation complies with the PCI-DSS standards.

Please click for links to the Wireless and Tokenization guidelines or the PCI Security Standards Council website, where you will find guidance, Self-Assessment Questionnaires, lists of qualified Assessors and other valuable information.

Having seen Chip & Pin widely accepted by cardholders and retailers for face-to-face transactions, the card industry has turned its attention to cutting identity fraud where the retailer and cardholder don’t meet.

And after a few years of a softly-softly “carrot” approach, the “stick” has appeared in terms of increased – and avoidable – transaction costs and penalties where businesses do not comply with the common standards for cardholder not present (CNP) transactions through mailorder, by telephone or via the internet.

It is very unusual for us to find that retailers are not now capturing the 3-digit signature strip code in all CNP transactions, but it is common to find a belief that it is adequate for web transactions. While it is a useful tool for reducing the potential for fraud when transactions are through the internet, cost savings flow from 3D Secure being in place. (3D Secure is the catch-all namefor systems such as Verified by Visa or Mastercard Secure Code).

Even where 3D Secure is available, it is often not functioning and penalties run on average at 0.5% of credit card transaction values and 10p per debit card transaction. Every single penny of that penalty is avoidable.

The other primary area of avoidable costs is to ensure that cardholder data is handled in compliance with Payment Card Industry Data Security Standards (PCI-DSS), and, when systems are compliant, to ensure that the merchant acquirer is aware. Penalties can be as high as 0.85% of all transaction values and the solution can be as easy as filling in a form for smaller retailers with only face-to-face transactions.

It is more complex for larger retailers and those who transact through mail-order, telephone or the internet but I believe that it will not be long before the non-compliant have their ability to accept card payments revoked.

The downward trend is attributed to fraud fighting initiatives, Chip & Pin cards, and – crucially – increased awareness among retailers and consumers of secure identity measures like CV2 (the 3 digit signature strip number) and 3D Secure (the password process known as “Verified by Visa” or “MasterCard SecureCode” and which is increasingly common during web transactions).

Online banking fraud losses totalled £46.7 million in 2010 – a 22% fall on the 2009 figure – as banks installed sophisticated fraud detection software and more consumers equipped their PCs with up-to-date anti-virus protection. The dip in online fraud has occurred despite a continuing rise in phishing attacks, up 21% from 2009.

Phone banking fraud losses totalled £12.7 million during 2010, an increase of five per cent from 2009. Most losses involve customers simply being tricked into disclosing their personal security details – through cold calling or fake e-mails, says Financial Fraud Action UK.

Stephen Whitlam, a banking specialist with Expense Reduction Analysts says “Over the last couple of years we have stressed to retail clients the importance of basic protections like CV2 when accepting mail/telephone card transactions  and 3D Secure for internet sales. We expect them to see the benefit overtly in reduced processing costs, but it is clear that reduced fraud losses are also a major incentive. I certainly anticipate that the Card Industry will mandate these processes uniformly shortly”.

There is widespread evidence that most of the major merchant acquirers are imposing – or trying to impose – price increases across great swathes of their customer bases. The reasons given to justify the hikes are real enough, with the acquirers facing external cost increases that I will discuss below, but Expense Reduction Analysts banking Team commonly find:-

i.            That the new tariffs often represent more than cost increases being passed on, with acquirers – and I am being diplomatic here – putting a “spin” on their explanation that disguises increases in their margin.

ii.            Increases apparently imposed without any specific notice at all, with claims that “a standard letter was issued” or the increase was detailed in a statement message. (Who, in a position of authority in any business of any scale reads statement messages from acquirers?)

iii.            Justifications alluding to cost increases that occurred before a particular tariff was agreed.

I mentioned that the reasons for the increases are real enough. In a bit more detail these include:-

1. The two major card branding schemes (Visa and MasterCard) are both increasing the underlying cost to acquirers of secure mail-order/telephony transactions. The scale of these increases is staggering and varies between 44% and 69%. This level of imposed increase represents a step change in the acquirer’s costs of these transactions and in many cases mean that they would be facing losses on them. The increases kick in next Spring but – in the scheme of things – one can understand pricing impacts for businesses being negotiated or advised right now.
2. Many credit card issuers are upgrading standard accounts to premium accounts (such as MasterCard World) at renewal. Acquirers face a significantly higher interchange cost from the schemes for processing these types of card. Tariffs often incorporate a single fixed price for “credit cards” and – given the increasing proportion of premium account holders within the transaction mix – acquirers will at best be facing diminishing margins unless they adjust.
3. Some acquirers have very sophisticated back office systems which allow them to differentiate between secure and none-secure cardholder not present transactions (where “secure” means correct application of either 3-digit signature strip protection for mail-order/telephony or the password-based 3D Secure system for e-commerce transactions). Some cannot differentiate. The penalty costs faced by the acquirers (for non-compliant transactions processed by their merchants) are hefty and increasing.

So, in our projects what do we do about these increases if they are “justified”? After all I do concede that underlying pressure on acquirers is being caused by external elements and they could even be facing potentially unsustainable losses on some transactions.

-          The first part of the answer – at its simplest – is to ensure that the reasons given are actually justified. Negotiated tariffs/margins are negotiated tariffs/margins in my book and cost features in existence at the time of (or prior to) negotiations cannot be used to justify subsequent unit price increases. And because, whether we like it or not, card acquiring is a numbers game, mistakes like that do creep in. I ought to add here, in the interests of fairness to the professionals I deal with in the acquirers, instances like this are swiftly apologised for and corrected.

-          Secondly it’s about making sure that the impact of the increases is limited to no more than passing on the cost changes that the acquirers themselves face. I cannot add an “in fairness” comment here because my experience is that a rise in external costs is often used to mask margin increases. That is the case now in many of the standard tariff increase letters that I have seen and that I am robustly challenging.

-          Thirdly, if an increase is unjustified and – really critically – results in a client facing tariffs that become uncompetitive, we will recommend the activity is tendered. Card acquiring remains a very competitive industry and whilst that should be a last resort, it is actually often straightforward.

The above actions really do rely upon detailed analysis, modelling and current market knowledge both to assess their potential value, but also crucially, to negotiate the optimum outcome. For example I mentioned a rise of 44% to 69% in acquirers’ own major external costs for transactions processed via mail order or telephone. This does not mean a 44% to 69% increase in retailer’s tariffs is justified as that is precisely the way that margins are unfairly increased at times like these. Our aim is to ensure that the actual cost….and no more….is passed on.

Virtually every business that accepts cards will already have received – or will receive over the next few months – an increase in their card processing costs….whether advised or unadvised. And if they don’t, I would suggest that they are already paying too much as otherwise it is hard to see how the acquirer can absorb their “hit” without comment!

This author has long-blogged and written articles stressing the importance that the card industry places on security measures. Their success now seems apparent as according to the UK Cards Association, total fraud losses on UK cards in the first half of 2010 were £187 million, some 20% better than the same period last year. I find it staggering that against the backdrop of the explosive increase in the use of cards – and in the throes of recovery from a recession, this is the  the lowest figure for 10 years!
The association, which represents all the country’s major card issuers and acquiring banks, claims the fall is down to several industry initiatives, including the increasing roll-out of updated chip cards and ongoing work with retailers to improve the security of their equipment and procedures.

Other factors include greater sign-up to MasterCard SecureCode and Verified by Visa, increased use of fraud detection tools by banks and retailers and the growing roll-out of chip and PIN abroad.

Card-not-present fraud fell 12% to £118 million and – as this fall bears out the effectiveness of security measures – expect greater emphasis on this aspect as it is still the biggest element.

In Expense Reduction Analysts’ Banking Team we are hearing whispers from various sources that both Visa and MasterCard are likely to increase the underlying cost of Mail Order and Telephone based card transactions next Spring – and also maintain or even increase the extra cost for non-secure transactions. So – because the medicine is working we anticipate more of it!

We expect that tariffs will continue to put a significant premium on riskier transactions; a classic “stick” approach. And because we monitor the underlying supply-side costs the acquirers face from the major issuing brands (Visa and MasterCard primarily), we can negotiate fair price points for our client’s transactions. Moreover, we can advise on or project manage clients through to compliance and help drive out the penalties.

Whilst I personally welcome the fact that this is a unified global response – and brings certainty into the banks’ planning equations – it also sets in stone the new liquidity reality. It’s fair to say that whilst the UK banks are already adequately capitalised, many overseas ones are not. We are already seeing Deutsche bank announcing plans to raise sufficient funds to increase its reserve capital by 50%/£10bn. European banks alone are estimated to face raising £110bn-£150bn.

“Reserve Capital” is just a ratio, though, and another way for banks to increase it is to shrink their balance sheets. That can mean divestments but it also – more easily – means reducing aggregate lending. So whilst UK businesses looking for bank facilities can perhaps breathe a collective sigh of relief that our own institutions are currently well capitalised, we should reflect that those serving our key European target export market are not.

The impact on pricing should not be forgotten either as the ratio of 7% is three times the pre-crisis standard. That means that the increase in average interest costs over and above Base Rate that I have previously blogged about (  http://www.expense-reduction.co.uk/2010/01/uk-banks-increase-business-cost-of-borrowing/ ) is here to stay. Finance Directors need to reflect that whilst interest costs have not fully reduced in line with the tumble to 0.5% base rates, it is certain that in the future they will fully reflect any return to historically more normal levels. In other words the margin increase is not temporary and reflects a new structural reality.

In essence today’s news is good in that it brings global uniformity and certainty to lenders. Moreover the ratio of 7% is probably at the lower end of their collective fears. But to use a medical analogy it is a splint or crutch that will aid, but not in itself lead to, recovery.

(The new ratios do need formal approval by the G20 by the way. And it is true that both the UK and US wanted stronger ratios of 10%, and Germany championed lower levels. So it will be interesting to see if G2o endorsement is a formality or not. My suspicion is that it will be, with perhaps some political posturing).

ABP Members get profit boost of £630,416

The Auto Body Professionals Club (ABP) is pleased to announce the excellent results that have been achieved so far from the profit improvement service offered by Expense Reduction Analysts.

Mark Bull, Director for ABP, has been working in partnership with Expense Reduction Analysts for some time. Mark comments, “The body repair industry has suffered from over supply for years.

This has created a difficult environment to extend margins through sales. As a result, inward business costs need to be tightly controlled. Our membership includes over 90% of the top 50 independent bodyshops. They boast to be amongst the most successful independent bodyshops in the

UK. Even so, they have welcomed Expense Reduction Analysts’ professional approach to profit improvement.”

Expense Reduction Analysts were introduced to the Club by Neil Kirk, Managing Director for Howard Basford, one of ABP’s Platinum Bodyshop members. Neil takes up the story, “When we first engaged Expense Reduction Analysts, we were part of Ford and so we challenged Adam Wheatley and his team to achieve savings against Ford prices.

Their ability to do this quickly established their credibility and ensured that a long and fruitful relationship would follow. Our experience of Adam and his colleagues has been so positive that we had no hesitation in introducing Expense Reduction Analysts to our colleagues in the industry via ABP.” Mark continues, “Following the excellent results achieved with Howard Basford,

Adam presented and shared the successes achieved to our Platinum Bodyshop members. Of course some were sceptical, but savings were so evident that a number participated in a trial, which has been to their benefit.

Since then, Adam has returned to Platinum Bodyshop member meetings to share with everyone the benefits achieved for participating members. Heading up the Expense Reduction Analysts team, Adam Wheatley is no stranger to working with alliance partners, “Over the years I have worked with a number of alliance partners. Working with ABP Club and its members has been different, by which I mean better. Their sustained desire to support our efforts to make their members more profitable has been most refreshing and you can see from the table below the impressive results that we have been able to achieve so far. ABP’s interest has always been in what we could achieve for their members, rather than what might be achieved for them.”

Mark Bull concludes, “The way that savings continue to mount up for members has been transparent and impressive. The additional profit is shared with Expense Reduction Analysts during the period of their engagement. Thereafter members benefit from 100% of the additional profit. Like other initiatives presented to members, ABP doesn’t take any commission or kick back in any way, this is a pure member benefit and we look forward to more taking advantage of this excellent service.”

It may mean that a long and stale period of rationalisation and mergers in the UK banking industry is coming to an end. Certainly Virgin are tipped to begin their retail banking venture shortly; and with Lloyds Banking Group forced by the EU to sell 600 UK branches to a new entrant before the end of 2013, true competition could be just around the corner.

All entrants are keen to include the business sector in their offering and – with the advantage of effectively starting afresh with systems and product offerings – the increased choice has to be welcome from both a service and cost-saving perspective.

Certainly in Expense Reduction Analysts’ Banking Team we will be watching the new kids on the block closely as we seek to present attractive options to our clients. We will anticipate that superior service allied to keen pricing will be a bedrock of any growth that new entrants need to secure themselves in the market, and that can only be beneficial.

In its ‘The Way We Pay 2010′ report, the UK Payments Council notes that cash, on the face of it, still appears incredibly popular, accounting for 60% of transactions, but this is down from 75% just 10 years ago. What’s more, of the 21 billion consumer cash payments made in 2009, 80% were for less than £10.

In just five years, cash transactions are expected to represent less than half the total for the very first time. The value of cash used is dwindling even faster compared to wealth and spending, rising only 7% in the last 10 years, while overall consumer spending has doubled.

The trend will accelerate over the next 10 years and by 2018 the amount of cash used in the UK will fall by 20% after adjusting for inflation, even though total spending will rise by around 15% in real terms, according to the report.

Technology and cultural changes are driving the move, with debit cards and contactless technology taking over from cash, particularly among younger generations.

Debit card usage has risen fourfold in ten years – to £264 billion in 2009 – four times as fast as overall spending, and will double again by 2018. Each adult now uses a debit card 158 times per year, almost every other day, up from a little more than once a week in 1999 and by 2018, one in four of all transactions will be on a debit card, up from just one in twenty ten years ago.

Whilst debit cards have have begun to replace larger credit card and cheque transactions they are also taking over from cash for lower value payments and this will continue with the rise of contactless payments.

Mike Bowman, head, policy and markets, Payments Council, says: “Contactless payment for small purchases has the potential to drive debit card usage even higher. With 18 billion cash transactions less than £15, there’s a huge opportunity for us to replace billions of these with a quick swipe past a card reader.”

The Council cites the way Brits pay in pubs and clubs as an example of this shift in technology and culture. In 1999, nine out of ten pints were bought with cash. Now only 40% of pub spending involves notes and coins and pub goers are much more likely to be eating out as well as drinking. By 2018, the report predicts cash spending in pubs will fall to just 25%.

Bowman says: “Although cash won’t disappear in our lifetime, the continuing payments revolution will make it an ever smaller part of our spending. Even the traditional sight of people waving tenners at the bar is fast vanishing. They’re more likely to brandish their debit cards now as they compete to get served.”

Not only are Brits less likely to pay in cash now, they are also no longer being paid in cash. In 1999 one in eight received their wages in cash. This was down to one in 20 by 2009 and is predicted to fall to one in 50 by 2018.

“More and more people have opened bank accounts in the last ten years, and fewer and fewer have jobs in manufacturing where a weekly wage packet is more common. As a result far fewer of us get wages cash-in-hand,” says Bowman.

Brits have therefore turned to ATMs to access their cash. There are 63,000 holes in the wall in the UK today, two-and-a-half times more than ten years ago. In 1999 62% of cash withdrawn from accounts came from an ATM – by 2009 it was 85%.

Meanwhile, cheques are continuing their slow death says the council, accounting for just two per cent of personal transactions in 2009 as increasing numbers of retailers stop accepting them. The group says that even if it does not embark on its controversial policy to officially phase them out, volumes will more than halve to just 248 million in 2018, making up just 0.8% of all the personal payments.

The council concedes they remain popular for person-to-person payments – accounting for a third in value – but claims the advent of online banking, and especially faster payments is accelerating the decline.

Around 22 million UK adults now operate their accounts online, while the report predicts that Faster Payments will see rapid growth, accounting for £836 million by 2018, up from £294 million in 2009.

Looking further ahead, the Council speculates that cash could be all but dead within 40 years ………..

“By 2050, using cash could well be a minority activity, much more the preserve of informal transactions. With around a billion bank notes created, distributed, collected and destroyed every year, the production and secure transportation of notes is an expensive and environmentally costly business paid for by the tax payer. A progressive move away from cash could hold many benefits,” says the report.

Stephen Whitlam of Expense Reduction Analysts says “negotiating reduced transaction costs for those clients accepting cards is something we are long-experienced in. It is a competitive market and so often we find that businesses use the services of their main bank, either through inertia or a lack of awareness of who the alternatives are. Moreover, published tariffs do not really reflect the alternatives properly as negotiation is a given. And its at tyh enegotiation point where we can make a difference, because we know the market, we understand the acquirer’s cost base and can cut a straightforward path thgrough any technical issues”.

In Expense Reduction Analysts we believe that it is key that retailers who adopt this method enjoy a more competitive set of costs than previously, or any margin on the low value goods sold can be all too easily lost. Pivotal in this is a full appreciation of the differing costs the acquirers themselves face; as contactless payments are priced differently for them by both Visa and Mastercard.

We are in a long-term strategic game here, where the card issuers and acquirers want to see a critical mass behind this payment variation and see it replace cash. And do not forget, a card is only one medium…..the technology can be embedded into anything, e.g. phones, mp3s &c.

MasterCard’s research has found that 53 per cent of consumers are enthusiastic about contactless payment because of the convenience and speed.

Some 38 per cent of people think they will be using cash less in five years’ time.

Those retailers who see spends per customer at or below £15 will latch onto the research finding that showed 16 per cent of people said they often did not make everyday purchases such as newspapers, sweets or cigarettes because they did not have change or did not want to break a note.