February 27, 2018
Hindsight, they say, is 20/20, and we learn every day that it is painful to know what could have been had we only heeded warnings, seen the signs, or had a little foresight. A recent glitch in processing cryptocurrency payments is like a juicy onion for payments geeks because it evokes so many rich payments-related discussions. But it will prove to be a prescient example of the kind of merchant dissatisfaction card associations and acquirers will face unless they seize the opportunity to upgrade processing systems immediately.
Visa’s Core Rules, and Product and Service Rules dictate how credit and debit cards branded with the Visa association’s logo can be processed for payment, and they are the umbrella under which nearly every business around the globe must operate. While most consumers (and many merchants) operate their entire lives without pondering the rules, assisting merchants in complying with them has been a large part of my life for the past eight years. Compliance with Visa/Mastercard rules/regulations is so important that we built it into the software we use to upgrade payments processing systems. These rules and regulations govern the way cards must be processed. Failure to comply with them means that card associations (Visa and Mastercard) can and probably will, shut a card issuer or acquirer down in an instant. WaveCrest, the issuer of crypto-backed cards including Bitwala, Cryptopay, Wirex, and TenX found that out the hard way when Visa did exactly that.
So, when Visa issued a new rule changing the Merchant Customer Code (MCC code) for processing Visa-branded credit card purchases of cryptocurrency, the acquirers and processors involved with those transactions had some changes to make. Merchants, such as Coinbase, were made aware of the change. But many merchants don’t have in-house credit/debit card processing systems. The function of processing those transactions happens at the acquirer. You can imagine Coinbase’s surprise when, after already being concerned that the new MCC code change would hurt their sales volume, they were hit with numerous complaints by customers. These cryptocurrency purchasers used their Visa credit or debit card to make purchases on Coinbase, but then inexplicably saw multiple charges to their card, additional unexplained fees, and in some cases, overdraft of their bank accounts – all billed to their statements by Coinbase.
The inside baseball of when and why customers’ charges were reversed and recharged to comply with the new Visa code is, by now, old news. Truthfully, except to payment geeks like me, that part of the story wasn’t all that interesting. But there are some big lessons for merchants and acquirers to learn from this episode, which we believe foreshadows the future of frictionless commerce transactions:
In the age of frictionless commerce, processing card transactions can’t be a static function – it must be a fluid, dynamic and agile process.
Merchants need more personalized and customized services from their acquirers.
Acquirers need more agile, data-driven systems capable of large-scale changes in response to market changes.
The mechanical function of processing credit cards hasn’t changed much since 2000. Payment processing systems were designed to perform a function: transactions; and acquirers charged one thing: fees. The net effect of this has been a flooded market with little to no differentiation, with value-added services that mostly stem from outside vendors rather than on innovation at the acquirer. The drive to obtain more outside services has fueled large mergers and acquisitions in the space. Shockingly, the data-driven society of the 21st century where algorithms trigger customized responses has yet to invade payments processing. Your search engine can customize content based on your last web visit, but a hikers-only online dating site gets basically the same payments processing function as your kids’ karate studio. And as we learned from the Coinbase debacle, the change to the function of processing those transactions isn’t as seamless as it should be.
Believe it or not, that is not WorldPay’s fault. WorldPay owns and operates some of the most technologically advanced systems in the industry. It isn’t Visa’s fault either. Visa is tasked with regulating transactions, and issuing new rules and regulations is perfectly expected in the normal course of business. It’s certainly not Coinbase’s fault. As the merchant, there is nothing they could have done as a merchant to influence what happened, at all.
The lack of fluidity in payments processing lies at the feet of an industry that has, until now, used data for marketing and customer acquisition, but not to improve functionality. The mechanisms to improve transactional functions simply didn’t exist, and in my experience, weren’t deemed necessary. If it ain’t broke don’t fix it was the way acquirers have operated, collecting their fees, and fighting each other over basis points to get new customers. But now frictionless commerce has changed all of that.
In the age of frictionless commerce, processing card transactions can’t be a static function – it must be a fluid, dynamic and agile process. Frictionless commerce payment options have exploded in the last three years, offering customers dozens of new ways to purchase goods and services. All these options have one thing in common: they rely on a stored credit card to be successful. A typical millennial’s Friday night: watching Stranger Things, having Alexa order your Domino’s, and waiting for her date to roll up in an Uber is the perfect example of how deeply embedded this business model has become in our culture. If the credit card on file doesn’t approve, none of those things will work, and neither will IoT-connected homes, in-app video game purchases, big-box stores’ new mobile wallets, or the slew of services becoming available in connected cars.
Merchants need more personalized and customized services from their acquirers. If they aren’t now, merchants will become painfully aware of the antiquated nature of processing systems when acquirers are incapable of providing the level of card approvals needed to ensure an uninterrupted flow of goods and services to make these models work. If every time you went to watch something on Netflix you had to re-enter a credit card, how often would you use it? Convenience is the driver in these business models, and in this age of frictionless– making commerce convenient must be a partnership between merchants and processors. That means acquirers must upgrade their existing static processing systems to more fluid, dynamic instrumentalities where algorithms access, digest & use data, and machine learning constantly updates the way transactions are performed, as necessary. Just performing a function is no longer an option for card processing systems. Acquirers should be using merchant’s data to create customized payments strategies that will guarantee optimized results. Merchants will demand individualized payments services once they learn that bespoke functionality is available and can exponentially improve their profitability.
The glitch at Coinbase resulting from a change in Visa rules caused customers a significant amount of pain. That, in turn, made for a very unhappy merchant. It seems that WorldPay and Visa were able to assuage this merchant’s concerns, but that glitch was small compared to what is coming as frictionless commerce continues to dominate, and merchants expand their business models to embrace stored credit card payment methods. Upgrading to a data-driven, agile functionality is crucial and urgent for the entire card processing industry. Let’s hope that this is one case where the 20/20 vision will be used with foresight, rather than in hindsight.