13 things payment companies, retailers fear this Halloween season

What keeps execs up at night in the payments, retail and banking industries? Quite a lot, including disruption from tech giants and competition from foreign rivals.

Fraud is also a major concern, with newer authentication methods under increasing strain. And the divisive political climate has already led companies to reconsider certain deals and business relationships.

This item is compiled from reporting by PaymentsSource and American Banker writers including John Adams, Kate Fitzgerald, David Heun and Michael Moeser. Click the links in each item to read more.

More continent-wide payment outages

Visa and Mastercard acceptance sticker
A man reaches for a door advertising acceptance of VISA and MasterCard at Gnomon Copy in Cambridge, Massachusetts on Wednesday, October 11th. Visa, the world's largest credit card organization, plans to sell shares in an initial public offering after rival MasterCard Inc.'s stock surged 84 percent in the 4 1/2 months since its IPO. PHOTOGRAPHER: JB REED
Legacy payment companies are under severe competitive and regulatory pressure to innovate, a trend that places increasing stress on older older parts of the payments system.

This innovation, spurred by PSD2 and broader e-commerce trends relies on platforms that, while frequently updated, are centralized and decades old. Companies like Visa and Mastercard talk openly about their concerns of being thought of as a dumb pipe for newer innovators, and have taken steps to open their networks to third parties to see them as partners instead of mere utilities.

Visa is combining technology and other systems as part of its acquisition of Visa Europe, which used to operate separately from the U.S.-based Visa. As part of this process, Visa is migrating its European processing to VisaNet, the card brand's global processing system. VisaNet is an existing processing system with multiple data centers in disparate locations and is capable of handling more capacity and scale than the local European system that was in place during the time of the outage.

About a month after Visa's European outage, Mastercard encountered a similar glitch for a brief period of time.

Mobile authentication meltdown

Smartphone with magnifying glass
Businessman using mobile smart phone with magnifying glass . Phone fraud concept
Many companies no longer rely on static passwords alone, and use two-factor authentication to protect consumer accounts. The problem is they're using the same second factor: text messages sent to mobile devices.

The drawback of sending a single-use code via SMS is phone numbers can be spoofed, and cellular accounts can be taken over by savvy scammers. In one recent example, a U.K. woman lost over £8,000, or about $10,600, from her bank account after fraudsters visited a branch of Three, her mobile provider, and persuaded it to transfer her number to a new SIM.

There are multiple ways to address this problem. One is to rely on the carriers themselves to shore up their defenses.

"SMS was primarily built as a communication tool, but it became de facto for second-factor authentication," said Pavan Challa, director of product management at Verizon.

Verizon is working with other carriers on Project Verify, which is designed to "not just use SMS but use your device, use the signals that have been sent to the network … customer information, AI, machine learning and blockchain technology," he said. "We want to build this multifactor authentication into the solution that's going to eliminate most of the fraud that's going to happen today."

On the banks' side, other options can complement what the carriers are doing. These methods will become increasingly important as more banks join real-time payment networks.

"Real-time payments comes with real-time fraud," said Eric Woodward, group president of risk solutions for Early Warning, which operates the Zelle payments network.

Amazon Go takes over retail

Amazon Go in Seattle
Pedestrians walk past the Amazon Go store in Seattle, Washington, U.S., on Wednesday, Jan. 17, 2018. After more than a year of testing with an employee-only focus group, Amazon Go opens to the public Monday in downtown Seattle, putting to the test the online retailer's technology that lets shoppers grab what they want and leave without paying a cashier. Photographer: Mike Kane/Bloomberg
Amazon is reportedly weighing plans to expand its cashierless Go convenience stores to include up to 3,000 units by 2021 — but traditional convenience stores may not feel the effects as much as the fast food market.

Amazon Go is focused on low-margin convenience store staples like prepared foods; it doesn't have cashiers, but it still has a human in place to check IDs for alcohol sales. It's those high margin, age restricted items that convenience stores profit from the most — and where Amazon Go offers the least differentiator.

But the fast in, fast out nature of Amazon Go takes aim at the model of fast food restaurants, which have been aggressively eliminating their own human interactions through the use of mobile ordering apps and kiosks.

"From a market competition standpoint, I see Amazon Go as a key threat to fast casual restaurants and QSRs, but not for C-stores," said Raymond Pucci, director of merchant services practice at Mercator Advisory Group. "A high percentage of sales in C-stores are for tobacco and lottery games, which require minimum age confirmation. Add liquor sales to that as well. That won’t work for self-checkout.”

The expansion of Go stores would take place in three phases with a total of 10 stores in 2018, 50 in 2019 and finally 3,000 stores by 2021, according to a Bloomberg report. An Amazon spokesperson said the company would not comment on rumors or speculation.

Visa, Mastercard's single payment button

Walmart shopping basket
A customer carries a basket while shopping for school supplies at a Wal-Mart Stores Inc. location in Burbank, California, U.S., on Tuesday, Aug. 8, 2017. Wal-Mart Stores is scheduled to release earnings figures on August 17. Photographer: Patrick T. Fallon/Bloomberg
Earlier this year, Walmart, Home Depot and other retailers met with federal regulators to express concerns about Visa and Mastercard's push to use EMVCo standards to support a "single button" for online payments.

The card network button is seen as a potential threat to PayPal, but the retailers are concerned the button will prevent them from routing debit transactions to lower cost networks, a potential violation of the Durbin Amendment to the Dodd Frank Act, which requires merchants have more than one debit network to route transactions.

The networks' argument for the single checkout experience is it will simplify checkout by making it similar to in-store payments; and it will also simplify payments for merchants by avoiding choosing among different mobile wallets. Visa and Mastercard have also said the single checkout experience won't prevent different mobile payment apps from competing.

Becoming a platform for extremists

Demonstrators outside Trump Tower
Demonstrators hold signs and shout during a rally outside of Trump Tower in New York, U.S., on Monday, Aug. 14 , 2017. Hours ahead of President Donald Trump's return to his midtown Manhattan apartment for the first time since taking office, thousands of people took to the city streets to protest his response over the weekend to violence at a white nationalist rally in Charlottesville, Virginia. Photographer: Jeenah Moon/Bloomberg
Following the shooting at the Tree of Life synagogue in Pittsburgh, PayPal banned the use of Gab, the social media platform where the suspect posted anti-Semitic messages.

Though the PayPal ban occurred the day of the shooting, many other companies banned Gab much earlier, The Verge reports. Apple refuses to host its app on iOS, and Google removed Gab's app last year for violating its hate speech policy, the article said.

Stripe is also weighing a ban, while Gab's hosting provider Joyent suspended its service for Gab on Monday, Engadget reports. Last year, PayPal enacted similar bans against racist groups following reports that white nationalists used its platform to fund their activities in Charlottesville, Va.

Some groups try to get around this ban by using cryptocurrency, but crypto sites like Coinbase have also enacted bans against such groups.

Planet of the APIs

Api - Wooden 3D rendered letters/message. Can be used for an online banner ad or a print postcard.
Companies like Stripe and Braintree offer APIs that allow the simple integration of powerful payment products. And as this technology spreads, so does its threat to traditional banking and payments.

Sensing an opportunity in the small business credit card market, Stripe recently set out to outflank big banks by offering APIs to enable its clients to issue their own physical and virtual credit cards.

The more Stripe can keep its clients from going to traditional banks, the more money it’s able to generate from its existing base. It’s also a way for Stripe to diversify its business away from competing with an increasingly aggressive PayPal, which has announced it will be spending upward of $3 billion annually on acquisitions over the next few years to process e-commerce payments.

Stripe does not have banking license, so it technically can’t offer credit cards. Instead, it partners with firms that can underwrite its clients. By avoiding the challenges recent fintechs such as Square and SoFi have faced when they applied for banking charters, Stripe can focus on its main business of processing payments.

Trump's pressure on cross-border payments, M&A

President Donald Trump
US President Donald Trump speaks after signing one of five executive orders related to the oil pipeline industry in the Oval Office of the White House in Washington, D.C., U.S., Tuesday, Jan. 24, 2017. Trump took steps to advance construction of the Keystone XL and Dakota Access oil pipelines while foreshadowing a "renegotiation" of terms and insisting that developers use U.S. steel. Photographer: Shawn Thew/Pool via Bloomberg
President Trump's isolationism is colliding head-on with a lucrative trend of Chinese tourists coming to the U.S. looking — and payments companies are caught in the crossfire.

Many Chinese payment companies have sought deals with U.S. and European merchants to make it possible for Chinese travellers to use their familiar payment brands in unfamiliar surroundings. Generally, the Chinese companies have made a point of saying they aren't going after the mainstream U.S. payments market; Alipay, for example, has stated that the volume of payments for Chinese travelers is all it needs out of the U.S. market.

That said, Alipay's statements came after the company's deal to buy U.S.-based MoneyGram fell through following pushback from the U.S. Committee on Foreign Investment.

Travelers from China provide the largest source of international tourist spending in the U.S., with more than a decade of double digit growth. Travel and tourism exports account for nearly two-thirds of all U.S. exports to China. Chinese tourism is a particularly important source of revenue for large U.S. cities such as Los Angeles and New York.

Taxi apps take over the wallet

A GrabCar driver displays the support information page on the Grab app on a smartphone in an arranged photograph in Singapore, on Monday, Oct. 31, 2016. Grab is riding a Southeast Asian ride-hailing arena with some 620 million people, forecast to grow more than five times to $13 billion by 2025. Photographer: Ore Huiying/Bloomberg
The ride-hailing apps like Uber, Lyft and Grab stand a good chance of disrupting banking and payments as much as they did the taxi industry.

Last week, Grab and Mastercard formed a partnership extending the reach of the ride-hailing app by making a prepaid card available to Grab’s 110 million users across Southeast Asia.

Prepaid and virtual accounts will be available within the Grab app next year beginning in Singapore and the Philippines, with other countries to follow, the companies said. This echoes the approach Barclays took for its cobranded Uber credit card, which riders can apply for and manage within the Uber app.

“Grab users who typically use the app to pay for rides and food can now shop online or in stores anywhere Mastercard is accepted, opening up new opportunities for consumers and merchants,” said Reuben Lai, senior managing director of Grab Financial, during an interview at Money20/20 in Las Vegas.

In many other regards, Grab is ahead of Uber in offering financial services. The Grab Financial platform launched in March to offer payments, rewards and loyalty services as well as insurance and financing to consumers, micro merchants and small businesses.

The persistent restaurant niche

Square Terminal
Many mobile point of sale providers have designed their offerings specifically for restaurants, where most payments are handled at the table by handing a card or cash to a server to take away to a POS terminal out of the patron's view. These providers include Punchh, MyCheck and Shift4 Payments.

Square is also getting more involved in this niche, threatening the traditional point of sale systems that have long handled payments for restaurant patrons.

Its new Square Terminal device isn't Square's first foray into the restaurant market. This year it also been offering a software package called Square for Restaurants, which handles front- and back-end operations through a single interface to remotely manage ordering and payments, update menus, and change floor layouts. It includes a feature that supports wait staff order placement, staff time tracking, tip splitting and fraud prevention.

Square is also active in food delivery. Square acquired Caviar, a mobile order ahead app, in 2014; it more recently bought Entrees-on-Trays and the corporate catering service Zesty.

Alipay's stealth invasion

Alipay displayed on a Verifone terminal
Signage for Ant Financial Services Group's Alipay service, an affiliate of Alibaba Group Holding Ltd., is displayed on a payment machine inside a Sa Sa International Holdings Ltd. store in Hong Kong, China, on Tuesday, Nov. 1, 2016. The urgency to prepare regulatory environments for fintech is growing as banks begin offering digital services such as biometric authentication and as mobile-payment systems such as Apple Pay and AliPay are introduced around the region. Photographer: Anthony Kwan/Bloomberg
China’s Golden Week started on October 1 and with it, global cities and merchants were boldly promoting Alipay in an effort to capture Chinese tourist dollars. At the same time, merchants are building out a competitive acceptance network that could someday rival the major payment card networks.

Golden Week in China is a semi-annual consumer holiday. The first Golden Week coincides with the Chinese new year, which begins in January or February. The second Golden Week starts with China’s national day, which celebrates the formation of the People’s Republic. For the fall holiday, approximately 700 million Chinese consumers were estimated to travel domestically and overseas.

In the U.S. and other markets, merchants and acquirers have quickly and loudly rolled out the welcome mat for Alipay and its rival, WeChat Pay, to encourage Chinese tourists to spend money in their shops. Across the globe, Chinese tourists are making themselves well-known for their heavy spending habits, which tends to dwarf monies spent by other tourist groups. Since Chinese citizens are restricted by their government in terms of how much cash they can travel with, encouraging the use of Alipay and other mobile payment tools is a way for merchants to help the tourists get around this restriction.

Big problems surface in consumer credit

Total household debt as of June 30 2018
According to most major indicators, the economy appears to be humming along, as unemployment has hit a nearly 50-year low and spending among consumers and government agencies remains strong.

But credit problems may be lurking beneath the surface.

After paying down debt after the financial crisis, consumers have since leveraged up, pushing household debt to an all-time high. Over the past decade, student loans have more than doubled to just over $1.4 trillion, according to the most recent report on household debt from the Federal Reserve Bank of New York. Credit card debt, meanwhile, has increased 8% in the last year alone, the report said.

Over the past two weeks, bank executives have reassured investors that, while credit card charge-offs are edging upward, they are still manageable and low overall. At JPMorgan Chase, for instance, the net charge-off rate on its card portfolio was 2.91% as of Sep. 30, or four basis points higher than a year earlier.

“That’s something we’ve been tracking and guiding to and expecting,” said Chief Financial Officer Marianne Lake during JPMorgan’s Oct. 12 earnings call.

Other areas of consumer lending are showing more urgent reasons to worry. Discover Financial Services said Thursday that it expects charge-offs in its portfolio of personal loans — a business in which it has recently scaled back — to rise by 60 basis points in the fourth quarter, and hover around 5% during 2019.

Unsecured personal loans, of course, have been a popular product for customers looking to refinance high-cost credit cards, and several big banks — HSBC, Citizens Financial and BBVA Compass, to name a few — have recently gotten into the market.

The challenge with those loans, however, is that after customers use them to clear off their credit cards, they start spending heavily on those cards once again. Their credit scores suffer as a result, drifting downward.

“It’s very tricky to underwrite, because you get one decision,” said Discover CEO Roger Hochschild, in an interview with American Banker. “It’s not like a card, where you have ongoing data and you monitor it. You decide who to give a line increase to and who you don’t.”

Millennial fintechs continue to make inroads against banks

Baiju Bhatt, co-founder and co-chief executive officer of Robinhood
Baiju Bhatt, co-founder and co-chief executive officer of Robinhood Financial LLC, speaks during the TechCrunch Disrupt 2018 summit in San Francisco, California, U.S., on Thursday, Sept. 6, 2018. TechCrunch Disrupt, the world's leading authority in debuting revolutionary startups, gathers the brightest entrepreneurs, investors, hackers, and tech fans for on-stage interviews. Photographer: David Paul Morris/Bloomberg
Sporting tight jeans and long haircuts, they don’t look like bankers. But they have a number of things to say about the financial services industry, most of which would never be heard from the mouth of a banker.

“We're not trying to preach austerity to the client, because that’s a bummer,” Manning Field, Acorns’ chief commercial officer, told The Los Angeles Times.

Investors love them for it, skyrocketing the valuation of these millennial fintech apps (trading app Robinhood was valued at $5.6 billion in May). Young customers flock to their offerings, the majority of whom are almost exclusively mobile-first: PwC reports 50% of customers now primarily rely on mobile banking, and mobile is the only channel that has seen increased engagement in the last five years.

Some banks have tried to play dress up and create their own millennial digital-first units and apps, though there are doubts that is enough to scare up the kind of traction with young customers they need to stay relevant.

The threat is real for industry incumbents. According to a new global fintech report from Accenture, 19% of U.S. financial institutions are now new entrants, and they have captured 3.5% of total banking and payments revenues.

“Ten years after the financial crisis, the banking industry is experiencing a level of competitive intensity and disruption that’s much greater than what’s been seen before,” said Julian Skan, a senior managing director at Accenture.

Amazon applies for a fintech/ILC charter

Jeff Bezos, president and chief executive officer of Amazon.com.
It’s not just upstarts worrying bankers; they also continue to be worried about the financial services plans of Amazon, Google, Apple and other large technology firms.

That includes whether any of them might apply for a banking charter. The Office of the Comptroller of the Currency may have made that easier this year by finalizing plans to create a nonbank fintech charter. So far no firm has applied but several companies have reportedly been in talks with the OCC.

Tech firms could also still use the industrial loan company charter offered by the Federal Deposit Insurance Corp. Several fintechs have flirted with or attempted to obtain such a charter, and new FDIC Chairman Jelena McWilliams has said the agency needs to give applicants quicker answers on whether they can have a charter.

To be sure, Amazon et al could go other routes to sate their financial services ambitions, including a partnership with an existing institution. News broke early this year that Jeff Bezos' Amazon might partner with JPMorgan Chase to open checking accounts for prime customers — but nothing has been heard since.