Illinois has partnered with MasterCard to offer a new innovative credit card rewards program for their Bright Start College Savings Program. Families can now use their Bright Start Futuretrust Mastercard card and receive 1% cash rebate to save and invest money tax free to pay for college expenses. It’s the first and only 529 rewards program.

Bright Start makes a one-time $25 contribution upon the first use of the card as well as enhanced rebates at selected retails such as JCPenny 4%, Barnes & Noble 3%, Lands End 4%, Oversotock 3% and many more.

This move highlights the ongoing high stakes effort by all payment providers, both conventional (Visa, MasterCard, AMEX & DISV) and new entrants (Google Checkout, PayPal, Bill Me Later, Revolution Money, Tempo) to create incentives for consumers and merchants to use their payment instrument as their preferred form of payment.

The new entrants have been vying for a piece of the payment acceptance market and are trying to get a critical level of wide spread acceptance as quickly as possible - or face the high probability of failure. Revolution Money, for example, has bet that their success in the market place will be driven by their lower fees to merchants and for consumers their PayPal like features in the social media and blog space for small dollar payments.

It’s an ongoing challenge to construct the proper balance of driving demand from both the consumer and merchant side. MasterCard’s partnership with the State of Illinois demonstrates that the incumbent credit and debit card providers will continually heavily rely on driving their market dominance through consumer demand.

PCI Compliance requires that merchants properly protect credit card data. The difficulty with that requirement is that storing it onsite often requires expensive hardware and software upgrades. Tokenization provides an alternative to expensive on site storage and allows merchants to store all sensitive customer data remotely in a PCI Compliant environment, without spending money on any upgrades. IT Security expert Joel Dubin explains it well:

Tokenization is a technology that enables a token to replace a credit card number in an electronic transaction. This token or reference number is meant to prevent the theft of the credit card number during electronic transmission and storage of a transaction. Since the reference number can’t be used for transactions or fraudulent charges, there is little harm done if it’s stolen.

Tokenization [can make] systems compliant without costly changes by using a 16-digit randomly generated number resembling a card number. The only numbers from the original card are it’s last four digits, which become the first four of the token. Using only these four numbers, the token is still PCI compliant.

For credit card processing, merchants get a unique token associated with the information that was submitted to an off-site vault. This unique customer identifier can then be used to remotely initiate transactions and change or delete files. Using this technology, merchants can completely eliminate the need to store credit card information on site.

Using tokens is not limited to storing credit card information. It can be used to store all sensitive customer information including banking account information, drivers license numbers, social security number, image documents, and just about anything else.

Other related posts:
PCI DSS Compliance basics for credit card security
PCI DSS Compliance and the cost of a credit card breach

Braintree solutions:
The Smart Approach to PCI DSS Compliance

Capitalism is alive and well in the payment processing industry. Since 1949 when Diners Club issued the first ‘credit card’, the credit card issuing world has been highly lucrative. It’s become even more lucrative considering that in the past six years the fees that banks charge on every credit card transaction, known as Interchange, have increased an amazing 117%. That increase of profits has come directly out of the bottom line of every merchant who accepts credit cards a form of payment.

Those profits have also lured in quite a few players who want a piece of the action. Companies like PayPal, Google Checkout, Amazon, Tempo, Bill me Later, and Gratis Card are just a few who are trying to capture a small part of the pie. Others like Dream Play Ventures have been trying to squeeze themselves into the value equation by offering valued added services on top of processing like targeted advertising.

The opportunity for these companies is that Visa and MasterCard, which collectively account for something like 80% of all processing volume, represent over 20,000 financial institutions that are fat and happy making a lot of money with their current revenue model. They’ve unilaterally been able to raise their fees and dictate their terms for years now. They’ve created a lot of animosity in the process and left the door wide open for new entrants.

Each of the alternative payment providers has a different value proposition for merchants. Companies like Gratis Card and Tempo are making a play for lower cost interchange which offers merchants a reprieve in their credit card processing fees. Their focus is also primarily on ‘swiped’ merchants like restaurants and retailers.

Other providers, who are focused on ecommerce, like Bill Me Later, PayPal, Google Checkout have created value propositions that include higher conversion rates, customer convenience and accommodating buyer security fears and preferences.

There is certainly a land grab going on right now as all of these providers are working both sides of the demand and supply equation. They need consumers to demand the service from merchants and merchants need the demand to justify the option. PayPal and Google obviously see this and have been trying to buy market share to secure a top 1, 2 or 3 position.

There are many more entrants that what I’ve listed and their not all going to make it. Unlike the current boom in social networking where new entrants can be successful by carving out a vertical, payment providers including alternative payment types will have to achieve some level of critical mass to remain viable. If they don’t, they’ll end up like Peppercoin, a micro payments provider, who raised over $10MM and then got swept up for something probably substantially less than that.

For Visa, it’s out with the old and in with the new. As part of a multi-year upgrade to their processing systems, they are in the process of launching Account-Level Processing (ALP) as its new standard for credit card issuance and usage. The change will allow consumers to keep the same credit card number regardless of their stage in life or particular card program. In the past, if you changed credit cards from when you transitioned from being a poor college student to a debt ridden professional, you got a new card with a new number. With Account Level Processing, you’ll keep the same credit card and your bank will be able to change credit limits, rewards, interest rates, and other variables on the back end.

The obviously advantages for banks is that they no longer have to issue new credit cards, which saves them money. They are also more likely to keep you as a long term customer as you move into different stages in life because you will be less likely to shop for a new credit card every time you want something different. The biggest incentive for Visa (and the banks) however is that ALP will allow them to better track your spending habits and then monetize that information to make you offers. Click here to read more about potential uses of targeted promotions and offerings and how this is slated to benefit merchants to help offset credit card processing fees.

Before ALP, only the first six digits on your credit card was used to process and manage transactions. Known as the Bank Identification Number (BIN), these six digits will become a thing of the past as all 16 digits will now be used in processing your transitions.

I was talking to David Fish, Senior Analyst at Mercator Advisory Group about this and his comment was that all the value that is being created by the ALP is now owned by Visa and the issuing banks. He said that processors acquirers (also known as back end credit card processors) should be banging down the doors begging for access to the ALP databases so they can tell their merchants who their best customers are.

I’ve been having a conversation with Aneace Haddad, founder of Welcome Real-time about some of the innovations in next generation payment products like contactless payments and EMV (a technology that facilitates communication between a point of sale device and a consumers credit card). Aneace’s company specializes in this.

The new technologies being developed like EMV will facilitate communication between a credit card and a point of sale device. So instead of your credit card issuer just capturing information that you spent $20 at Target, it could capture products purchased. That data could be maintained in aggregate and provide a much more relevant picture of your buying habits and preferences. It’s granular data that would piece together all of the other information that your credit card issuer already has on you. Some retailers are already doing this with their own programs such as Chicago based grocery retailer Dominicks with their Fresh Value Card.

With that data, the idea is that as you’re purchasing something from a retailer, the chip in your credit card would communicate with the point of sale device and use your buying history to determine what relevant and targeted things to offer you. Merchants would benefit from this as the revenue they would generate by offering this would offset some of the credit card processing fees they pay on the transaction.

Aneace shared a number of ideas regarding how these innovations may be prove useful to both consumers and merchants:

“Another angle we are exploring is something similar to roaming. When you go to another country with your GSM phone, you usually receive one or two SMS messages from your operator telling you which local operator to switch to for the best service. Why not have something similar when you use your card in a new country? The first time you pay, the receipt could include a roaming message from your bank telling you which bank’s ATM’s are free, or offering you special traveler’s insurance and a local number to call. You don’t want those messages popping up over and over again; the intelligence built into the new payment devices ensures that the message is only delivered once.Imagine for a moment that MasterCard PayPass cards are widely available across the US. Or if you prefer, look at Europe, and imagine that merchants already have a large number of customers using Visa Vpay debit cards, which all have chips. I’ve talked a lot about how a merchant can leverage data hidden within those card products to deliver targeted promotions. What else might happen in addition to targeted promotions?”

Tempo Payments, Inc. is shaking up the debit card processing industry, and at the same time, sending a loud message to the larger incumbent banks and financial institutions that have dominated (in near monopoly style) the payment processing space for decades.

Tempo’s innovation is a pin based debit card that works on the ACH network, which let’s them circumvent the issuing banks and therefore the high priced interchange that they charge. They’ve built out their own network and are now providing the platform for retailers, financial institutions, and others to issue their own private labeled Tempo cards to their customers. Prior to Tempo, it was largely cost prohibitive for all but the largest banks to issue their own cards because of the high costs of building the inhouse processing capabilty.

Tempo is providing a hosted solution that will allow retailers and financial institutions (banks, and non-bank card issuers) to issue and manage their own portfolio.

Now retailers such as Wal-Mart, Sam’s, CVS and others (who are currently signed up with Tempo) can issue their customers private labeled debit cards and and offset some of the transaction fees by the revenue they are generating. Financial institution’s are now able to do the same and effectively compete with the largest industry incumbents.

In April of this year Tempo secured an agreement with ChasePaymentech to make their debit card available to an additional 600,000 merchants. That was in addition to the existing 200,000 they already had.

One of the advantages offered to consumers is that they can now get a pin-based debit card that does not have to tied to a certain bank account, which is also advantageous to whomever is issuing the card because then they don’t have to be a bank.

What’s interesting about this is how a start up with only $17 million from venture capital firms Integral Capital Partners, Cardinal Venture Capital and Selby Venture Partners could successfully overcome the long standing barriers and gain admittance into the industry.

Others trying to enter the alternative payment processing space like Gratis Card should take note of their market penetration model. By inking a deal with ChasePaymentech they avoid the hassle that Gratis Card is dealing of signing up merchants one at a time. This is the chicken and the egg problem. Tempo is heading down a path of eliminating the supply problem which puts them in a much stronger position.

Tempo’s early success will surely attract a lot of attention from the large incumbents in the industry who are threatened by this such as the existing pin-based debit networks such as NYCE, Pulse, and Shazam as well players like Visa and MasterCard who see that disruption is coming.

Everyone wants a piece of the payment processing pie that is currently owned by Visa and MasterCard. Technologies are being developed that will serve as alternative payment methods to the plastic in your pocket. For example, now instead of paying with a credit card at the gas pump, you might have the option of paying with your drivers license.

I had a conversation today with Peter Guidi, VP of Sales for National Payment Card, who is pursing this technology. They’ve built some technology that allows consumers to swipe their drivers license at the gas pump to pay for their purchase. (more…)

I had an interesting conversation today with Paul Harkins today, CEO of DreamPlay Ventures. Dream Play has developed technology (and has filed for a patent) that would allow businesses to print targeted advertisements on credit card receipts and at the same time, generate revenue. They are currently only targeting brick and mortar merchants, online retailers will be in phase II and include a search engine optimization component.

It could be a great way for businesses to offset some of the fees they are paying for accepting credit cards. It’s a good idea but DreamPlay will need to convince credit card processors like ChasePaymentech and First Data to sign up. On this point, he assures me that in the coming months they will have some important announcements.