An interview with Mr David Lambert, EVP, Alternative Markets, from Secure Trading, answers questions on the growing markets in payments and global remittance industry.

We managed to catch up with Mr. David Lambert, EVP of Alternative Markets of Secure Trading. It is one of the world’s leading independent payment service providers. He has kindly given his time to answer questions asked by Aamer Abedi, on the growing markets in payments and global remittance industry.

We would like to thank David for responding to our questions and providing some really insightful responses.

Below is a transcript of the interview:

Aamer: Cash is still king in the remittance industry? Is this statement still valid?

David: The difficulty with cash in any business is that it can go missing, may not be reported properly and can risk the validity and good standing of the company. Most importantly, it represents an open invitation to the money launderers and with remittance in particular, that invitation becomes much more enticing. In some parts of the world, cash rules but in Europe, where a significant proportion of MTOs reside, the coupling of regulation and licencing with the advancing technologies of mobile and ecommerce suggest that cash is very much being replaced by fully regulated online money transfer systems. This can only be a good thing, as it brings comfort to all of the acquirers underwriting the opportunity.

Furthermore, software and payment service providers have the technology that can provide accurate reconciliation reports. Financial audit trails are key to any company but when we move into higher risk circles and money remittance especially, they become essential. So in a nutshell, by moving away from cash towards online and mobile channels via card payments, you are by default setting up a more compliant way of doing business.

Aamer: There are many terms uses in the payments industry- can you please distinguish between an issuer and an acquirer? Payment processor and payment gateway?

David: The issuing bank (issuer) is the bank where the cardholder funds are coming from. So this would be Barclays, Lloyds, Natwest, HSBC etc. The acquiring bank (acquirer) is the processing bank. There is no difference between an acquirer or a payment processor. The payment gateway (Secure Trading in this instance) collects the payment and sends it to the acquirer/processor. The best way to remember the flow is by following what I call the AVIVA model. Once the gateway collects the payment, packages it and applies any fraud rules, 3D Secure or other functionality, it then goes through the AVIVA process.

A – The acquirer/processor is notified that a transaction is coming.
V – Visa and Mastercard are then notified by the acquirer that the transaction is coming.
I – Issuer (Natwest, Barclays etc) receives the transaction package. They then perform their internal checking on the transaction. Did it pass 3D Secure password and/or address verification, are there sufficient funds in the cardholders account, has the card been cancelled/expired etc. This enables the issuer to approve or decline the transaction.
V – The issuer then notifies Visa/Mastercard if the transaction has been approved or declined.
A – Visa/Mastercard notify the acquiring bank or processor who in turn settle or decline the transaction and notify the gateway. As you can see, along the way, all of the key components come into play and this process should last no more than a second.

Aamer: Traditional agent based MTOs are migrating to online and mobile channels? Is this a marketing statement promoted by online payment service providers or is there research out there to suggest online adoption trends?

David: In my opinion, the shift to mobile and online channels is not solely linked to remittance. As the high street stores manage rising overheads, it makes sense to run more and more of their businesses online. This is widening out to money remittance in particular and I have seen an enormous rise in the number of applications coming in from MTOs looking for merchant services. The challenge of course is that the transaction becomes “cardholder not present” rather than a customer facing point of sale. As a result, the risk to the acquiring bank is increased. By using technologies such as RemitONE and Secure Trading’s robust gateway, we can work to combat the transition and bring comfort to our acquirers.

Payment Service Providers in the UK (and the acquirers themselves) are still very new to the world of MTOs as there is a negative stigma around the business type. Many are not willing to entertain the idea as they believe their corresponding banks will not have the appetite. At Secure Trading, I try to adopt a more left field approach by understanding the MTO, its requirements and needs and this allows me to qualify the opportunity from there.

To date, the principal partner bank that I turn to which provides merchant accounts for online money transfer organisations is slowly warming up to the idea that there is significant value to be gained from working in this sector – that awakening can be likened to the early stigma behind the lending sector almost a decade earlier. This change of mindset has now become a regulated revenue generator for a number of tier one UK processors.

Aamer: What is the difference between a merchant account and an Internet merchant account? Why is it difficult for startup and even established MTOs to acquire this account? Is it easier in the US? Who do they go to to get merchant accounts and payment processing functionality?

David: The first point to make is that it is much harder to get a merchant account for MTOs in the US than it is in the EU. A particular US based MTO that I work with has received several awards from significant global organisations for their work in this sector. Yet they cannot get approved for a merchant account stateside. They are simply seen as too much of a risk. A strange and unexplainable paradox but such is the attitude in the US towards MTOs. If you find yourself being approved quickly (24-48 hours) as an MTO, you should be asking questions about that acquirer and their own standing as a bank.

The longer the approval process, the more confident you should be with the processing bank. Always ask if the merchant account is direct as well. Quite often, the fast approvals set you up in an aggregated pool account where you (and many other merchants) sit behind a different master merchant account. This presents its own challenges as any merchant within the pool suffering high fraud ratios or chargeback issues risks the whole aggregator being closed down. As a general rule of thumb, two weeks for approval or at least initial feedback should be a good sign.

In terms of the difference between a merchant account and an internet merchant account, this is whether the transaction is via a point of sale terminal in store or done online. For reference, the third type of merchant account is a Mail Order Telephone Order – MOTO – where the customer phones through their order and the details are inputted into a compliant Virtual Terminal.

Start-ups struggle most in the sector because they have no trading experience online, yet they’ve been trading in store for years. Again, this is due to perceived risk and because processors view online business as opposed to in-store as being very different animals. And this is again where RemitONE and Secure Trading come in to work with you, develop the solution and ultimately bring comfort to the acquirers.

Aamer: We receive several enquiries from startups and established MTOs seeking merchant and internet merchant accounts. For their benefit, please clarify what the industry term is for payment companies that provide both a merchant account and payment processing functionality?

David: There is no standard term for this. Anyone who can provide a merchant account is either called a processor or an acquirer. Sometimes people call the gateway a processor but the correct terminology is that a gateway feeds into an acquirer or processing bank.

Aamer: How is the agent to online migration happening in emerging markets like Ghana, Nigeria, India and China?

David: Typically these are seen as problematic hotspots by the acquirers as far as money remittance is concerned. China, especially as moving money in and out of the region, is far more problematic than anywhere else in the world. The way many MTOs operate is to settle their funds within a client managed account in the country of origin. So a UK based MTO should have a regulated fund within the UK from where they can instruct funds to be sent. From an acquirer’s perspective, it also helps if there is transparency (and a formal agreement) between the MTO and a corresponding bank. As a UK based MTO, if I wanted to send money to India, I would be expected to transact and settle into a UK based holding bank. Once the transaction has cleared, I would then instruct the bank to remit to the corresponding bank.

Some acquirers see this as the end of the process (as far as their risk is concerned). Others see the risk continuing until the funds arrive and are distributed out of the corresponding bank in India, Ghana, Nigeria etc. Quite often, it isn’t necessarily the region where monies are being sent – it is more about how the MTO is configured to mitigate the risk. If the MTO adopts 3D secure, shows great governance and a high due diligence process to ensure they themselves are preventing bad traffic from coming through (with the assistance of RemitONE), then an approval is far likelier to happen.

Aamer: If a startup MTO or an established business wants to offer online remittance services in the UK and Europe, what steps must they take? What do they need to have in order before they even start talking to payment processors?

David: Any MTO looking for an online merchant account should be FCA regulated and needs to look at obtaining a money remittance licence. Crucially, there must be an incorporation and bank account in the country or region where the acquirer is based. Whether that is UK, EU, US or beyond, the entity contracting with the acquirer must have a staffed office in that region. Furthermore, the bank account where the acquirer settles funds must have the same name on it as the business that contracts with the acquirer.

In essence, what measures are you taking to show you are exercising best practice at every stage of the process? The underwriters will do deep dive checks on the directors of the company, so can you be confident that your directors have not got a chequered financial background? The due diligence process does not differ too much from a mortgage application – you are trying to show that you have all of the right credentials for a bank to issue you with your merchant account.

It is important to understand that MTO online is in its infancy and with that comes a stigma and negativity from the majority of the acquirers. The combination of Secure Trading and RemitONE yields over 30 years of acquiring and remittance experience and we work closely to provide the most realistic and efficient solutions that are designed to help grow your business. It is never an easy challenge but with the right approach, our goal is to educate more and more of those processers to illustrate the measures you have taken to ensure a bright future for online trading.