SPEAKER_01 0:00

Welcome to this episode of Defense Cat with Jason and David. Let's jump right in to make the demons and baby and happy Wednesday, Jason.

SPEAKER_00 0:24

Stoked to be in the office for another Wednesday recording session. Although I remember telling you I was gonna get a haircut last week and never did, so we will not be saying goodbye to Deluscious Locks just yet.

SPEAKER_01 0:34

Yeah, Hayden, thank God this is not a video podcast. Otherwise, our uh viewers would probably be concerned that you are in fact Bigfoot. But I am sure the salons will be more than glad to take your money. It's been super exciting frequenting some of the businesses here in Newport Beach that have recently reopened. And one of the common themes I've seen is a lot of them have updated their point of sale solutions.

SPEAKER_00 1:02

Yeah, well, when I go in to get my haircut this week, I will definitely be sure to keep an eye on that. Well, let's dive right into today's topics. First, FIs or fintechs, are they friends or foes? Next, mobile wallets moving mainstream.

SPEAKER_01 1:16

Merchants, pay attention to this.

SPEAKER_00 1:18

And finally, Qual Pay quietly quits biz ops. The FTC shuts down more fraud. Jason, due to COVID-19, it's no surprise that everyone in payments has had to speed up their digital roadmap. And over the past few months, we have seen years worth of payments innovation. Due to all this, financial institutions, payment networks, and digital-only banks have newly emerged opportunities. Digital first and hybrid models are very likely to succeed in a post-COVID society. But Jason, do you think we will see FIs partnering up with fintechs who were before considered competitors?

SPEAKER_01 1:51

Yeah, Hayden, it's been really exciting to see the adoption of mobile and digital banking solutions from sectors of the population that were traditionally scared of it. In fact, I had to help my parents get set up with online banking for the first time because the physical branches weren't open. And you're absolutely right. There's been a huge focus on traditional financial institutions rapidly rolling out and launching new digital solutions that allow for faster and more real-time transaction processing. Zell has put up record numbers of transactional volume since COVID. And I think a lot of the digital only solutions, commonly referred to as banks in the sky, have significantly less overhead. And it's allowing them to offer more competitive banking solutions. Large organizations tend to move very slow. We've worked with a number of significant FIs, and simple things like contract negotiation can take months, let alone rolling out a new technology initiative. And I think that's where a lot of the digital only solutions and the bank in the sky solutions have a huge strategic advantage. They're smaller, more nimble, they can quickly innovate without a lot of red tape. And I think ultimately what's going to happen is a lot of the larger financial institutions are going to need to adopt solutions developed by the fintechs and the digital only banks if they're going to stay competitive.

SPEAKER_00 3:21

I agree, Jason. And an FI's ability to be agile is going to be key, but how permanent do you see the shift to digital first actually being? It's permanent for sure.

SPEAKER_01 3:31

Now that we have retrained customer behavior, we've gotten people used to using online banking, remote deposit, wallet-based solutions as opposed to walking into a physical branch. The trend is here to stay. In fact, it's not even a trend, it's a shift in consumer behavior. People have realized that they can survive without having to walk into a bank branch. And I predict that we'll see lots of traditional brick and mortar locations shut down. It's not going to be necessary to have 20 branches of the same bank in a 10 mile radius anymore. Now that people have adopted these digital banking solutions and more importantly, loaded their payment instruments, be it their banking information or credit cards, into their mobile wallets, it's here to stay.

SPEAKER_00 4:19

Well, Jason, now that consumers have adopted mobile banking, merchants need to be prepared for the spike in mobile wallet usage that is to come in our near future. 40% of individuals are doing more of their daily retail and transactions online, and 22% of the population surveyed say that these shopping habits will stick. What advice do you have to give to these merchants in order to prepare them for this boost in mobile wallet usage?

SPEAKER_01 4:43

Well, Hayden, first, I think it's important to recognize that there really is a new breed of payment technology companies that have been flying under the radar for the past year. And COVID has certainly accelerated their development process and the the sheer number of them. The legacy players just move too slow and their interfaces are too antiquated. I've said years ago that the days of traditional terminals and standalone payment solutions were numbered. And it's only a matter of time before transactions are conducted from device to device via NFC or BLE without the need for separate card acceptance devices. ISVs are already paving the way for these types of solutions. In fact, we've been working with a couple that are developing Bluetooth-based solutions where the merchant won't even need a terminal.

SPEAKER_00 5:33

If you think about it, not too long ago, contactless meant having a plastic card to wave at a terminal, but now the definition of contactless needs some readjustment. Somebody who would normally reach for a card in their wallet to be used at a terminal may second guess typing in their pin into a keypad that has been touched by thousands of people just in one day. So where do you believe these merchants should go in order to receive integrated payments functionality that they need in order to make their consumers feel safe when checking out? Hayden, that's a great question.

SPEAKER_01 6:02

And you're absolutely spot on. And I think it goes beyond just the concern about putting a pin into a keypad. The other big factor, like we mentioned earlier, is the fact that consumers have adopted mobile wallet solutions. I used to make the argument years ago that, hey, my card works just fine. Why would I use a mobile wallet solution? And I think the push to contactless, not just as a different payment mechanism, but as a health concern, has really driven this forward in a big way. And I'm actually gonna go a step further. I think the days of physical cards are actually numbered. You're seeing more and more of these bank in the sky and digital banking solutions that are issuing virtual cards that are attached to your account. In fact, I just got the Robin Hood Cash card through Robinhood and it gave me the card number and all the information in real time. I was able to immediately add it to my Apple Pay wallet. I think these solutions are going to become more and more prevalent with traditional banks. It's only a matter of time before you open a new checking account online and you can instantly download your debit card directly into your mobile wallet. The other factor here is I think that PIN numbers are on their way to being obsolete. As cards are loaded into mobile wallets that have biometric protection, the biometric, be it scanning your face, reading your fingerprint, or as a fallback, entering your pin directly on the device, are rapidly going to replace pin entry on traditional terminals. My advice to merchants right now is to sit tight. This landscape is evolving very rapidly. And there's a lot of very exciting technology that is coming through the pipeline. I think for now, merchants need to make sure that they avoid long-term contracts and commitments for merchant processing or for POS solutions, pay attention to industry trends, and find trusted payments partners that are going to provide the next generation of payment solutions.

SPEAKER_00 8:07

Jason, there are also ways to get consumers excited about using their mobile wallets. And what incentives do you think can be offered to get consumers to want to use these new forms of contactless payments?

SPEAKER_01 8:19

You know, it's funny, Hayden, years ago at the Money 2020 conferences, it was all about incentives to get people to use mobile wallets. And I think a lot of that goes back to the premise that at that point in time, and even up until recently, for a large segment of the population, the traditional plastic card worked just fine. We actually discussed this in our first episode of SenseChat with the prediction of COVID being the contactless catalyst. And that's the exact trend that we are seeing here, that based on the health emergency, there's been a massive shift to contactless and wallet-based payments. So I think the incentive is staying healthy. I don't really think that banks and traditional FIs are going to need to provide an incentive to get consumers to adopt wallet-based payments. But there's another side to that coin. One of the huge advantages to contactless payments that are secured by biometric authentication is that it's very, very hard for fraudulent transactions to take place. If I lose my credit card somewhere and you pick it up, it's very easy for you to walk into the store and swipe it. However, if I lose my iPhone, you can't just walk in and make a payment with it without having my face or fingerprint. And I have the ability within seconds to remotely disable or lock that device. That's a huge advantage to financial institutions because it eliminates a significant amount of card fraud. I think banks that want to be very aggressive, not in driving wallet adoption, but in attracting new customers, are going to start providing incentives for utilizing their virtual or digital cards in wallet-based solutions. As the cost of fraud goes down for these financial institutions, it will give them more capital in their card issuing programs to create incentives, cashback rewards, travels, et cetera, et cetera. And I think that's where incentives can play a big factor in not necessarily contactless adoption, but new customer acquisition for these FIs. It's a huge business opportunity for the right type of reward programs.

SPEAKER_00 10:39

Well, Jason, it was the final straw for a scammy BizOp company. We have yet another FTC settlement this week, and this time it is with Qualpay, a California-based payment processor. Allegedly, Qualpay ignored clear signs that its client was operating unlawfully. And according to the FTC, for years they were processing payments for Moeb, who work in the field of business coaching and investments. They were charging consumers hundreds of millions of dollars for products that were deemed useless. Qual Pay made the mistake of deciding to ignore these signs of fraudulent business.

SPEAKER_01 11:10

Hayden, I think we really should give the FTC a crash course on how to identify these guys. As I've said before, the payment processors for these scammy merchants know exactly what they're doing and they let it continue because it's profitable. If there's excessive chargebacks, there's a problem. There's either a problem with the product, the service, or some business process. And it's all about the company's posture and how they look at these chargebacks. Do they really want to fix the problem? I've talked to merchants before who have legitimate problems and need help resolving them. And I've also been approached by these nefarious merchants who are in the Visa and MasterCard chargeback mitigation programs that are looking for ways to circumvent the rules. They're the kind of people who show up to the party and say, hey, I did $800,000 in sales yesterday, $200,000 of it charged back. I'm $600,000 of the good. I don't see what the problem is. They're simply out for a cash grab and not to provide a quality product or service.

SPEAKER_00 12:15

Some raised questions included whether or not they were domestic or international, the nature of the business model, claims MoBe made in its marketing material about helping customers make hundreds of thousands of dollars a year, and their history of excessive chargebacks. On top of that, Qualpay failed to review Moeb's business practice in detail. One employee even stating, we cannot monitor their business and have no idea what's going on.

SPEAKER_01 12:39

Look, this is a simple conversation, and we have it with our acquiring bank customers all the time. If the bank or a third-party payment provider can't monitor a particular merchant or a particular industry type, they have no business processing for it. There's lots of high-risk industries where the risks can be mitigated with a deep understanding of the industry and card brand rules. In all of these high-risk industries, you have good actors and bad actors. Unfortunately, the few bad actors spoil it for an entire industry. We've helped acquiring banks develop several programs for high-risk industries, such as debt collection, multi-level marketing, boutique airlines, crews, events, all of which have higher than normal risk components. And in most cases, these programs are about identifying the bad actors and weeding them out so that you don't start processing for them and end up with chargeback problems. My advice to acquiring banks is if you're going to allow a third-party payment provider to play in one of these higher risk verticals, they need to be able to demonstrate domain expertise in how to identify the good actors from the bad actors and what their policies and procedures are for mitigating risk.

SPEAKER_00 13:56

Jason, Moeb's processing data off the bat showed red flags, like their large number of chargebacks and high volume of charges it was processing. And instead of investigating these issues, Qualpay decided to make Moeb work closely with chargeback prevention companies.

SPEAKER_01 14:11

Look, this is simple. If you as a merchant want to reduce chargebacks, you don't need a chargeback prevention company. You need a good product or service, good customer service, and don't use deceptive marketing practices. We've worked with merchants that are good merchants and run into chargeback issues. The good ones want to fix the problem. When a merchant with a good processing history starts getting an increase in chargebacks, a chargeback prevention company is not the solution. That's the last thing that you want to advise them to do. Figure out what the problem is and fix it. It's usually a simple process. Somebody's exploiting their payment page, there's an issue with their affiliate marketing program. Finding the root of the problem and solving it is what a good merchant is going to want to do, and it's the right course of action. If they're looking for an easy way out and using a chargeback prevention or mitigation company, that should be a big warning sign.

SPEAKER_00 15:08

Jason, to sum it up, under the FTC settlement terms, not only will QualPlay be prohibited from making or assisting merchants in making deceptive statements to consumers or working to avoid fraud and risk monitoring programs or to even process payments for other business coaching companies and high-risk merchants, but they imposed a monetary judgment of over $46 million, which was suspended due to the company's inability to pay.

SPEAKER_01 15:32

Hayden, I like what the FTC is doing lately in aggressively preventing third-party payment providers who are willing to aid in abed, fraudulent and scammy merchants from continuing to play in those industries. It's something I wish they would have done a long time ago. People like high risk because it's profitable, but there's good high risk and there's scummy high risk. If you're going to process for businesses in these industries, you need to work with the good actors. It's unfortunate that that money isn't going to be returned to the consumers that were harmed. I'm really curious to see how that suspended judgment plays out over time.

SPEAKER_00 16:10

Jason, I think you know what time it is.

SPEAKER_01 16:13

Give me those takeaways. Banks, embrace fintech solutions, or you'll find yourself with empty branches. Merchants, stay away from long-term contracts. Change is happening and it's happening fast. FTC, let us know when you'd like a coaching session on how to identify nefarious merchants and third party payment processors.

SPEAKER_00 16:34

Thanks for joining us today. And if you've got a topic you would like us to discuss, follow and message us on social media at SenseChat. And as always, we would love your feedback.