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www.TheStrawGroup.com / www.PaymentsPulse.com All Things Payments & EMV

Transcript of All Things Payments & EMVvertassets.blob.core.windows.net/download/46d8a8e0/... · *Electronic...

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www.TheStrawGroup.com / www.PaymentsPulse.com

All Things Payments & EMV

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Section 2: The Opportunity and Data Metrics

Section 1: Payments Primer

Section 3: Trending

To Be Covered

Section 4: The Future of Payments

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History and major payments milestones

Merchants having the ability to accept card brands is the foundation of the merchant acquiring industry

1920 Companies such as oil companies and hotel

chains issued their own credit cards

1946 First bank card

“Charg-It” is introduced

1949 Diners Club

card introduced

1951 Franklin National Bank

issues the first bank credit card

1958 American Express introduces its first

credit card

1959 Financial institutions introduce a revolving

balance option

1966 BankAmericard (now

Visa) and InterBank Card Association (now MasterCard) are

established

1986 Discover Card, originally

part of the Sears Corporation. Its first card was unveiled at the 1986

Super Bowl

1998 PayPal is founded

2006/2008 MasterCard and Visa go public; previously owned

by member FIs now regard themselves as payment companies

Section 1: Payments Primer

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The Changing Payments Ecosystem

Section 1: Payments Primer

Tech. Solutions Payment Brands

POS Providers, VARs, ISVs

3rd Party

Processors

Banks

Gateways

Acquirers

ISOs

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The typical transaction flow

Traditional Merchant Acquiring: Clearing & Settlement Overview

Payments Network remits

funds to the acquiring bank

If authorization occurs, the Issuing Bank withdraws and

remits funds through the Payments Network

Acquiring bank credits Merchant’s account, net of

fees paid to the Issuing Bank, Payments Network and Merchant Acquirer

Merchant submits transaction information to its Merchant

Acquirer

Acquirer transmits transaction, via 3rd Party

Processor, to the appropriate Payments

Network

Payments Network directs transaction to the respective Issuing Bank

for authorization

Authorization

Settlement

Merchant

3rd Party Processor

Payments Network Issuing Bank

1 2 3

4 5 6

$

Consumer

$

Merchant

ISO/Bank/Acquirer

Section 1: Payments Primer

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Issuing Bank

Card Brand

Sponsor Bank

Processor

Acquirer / ISO

Channels

Total Trans $0.11

Total Trans $0.08

Total Trans $1.41

Card Swipe Fee Income – Typical $100 Credit Card Transaction

with a swipe fee rate of 2.36%

Total Trans $0.02

$97.64 Revenue to Merchant

The economics of a $100 card transaction and the estimated revenue to each player in the value chain

Indirect / Traditional

ISO Direct Sales

POS Developers /

VARs

Trade Associations /

Other

Total Trans $0.74

Channel Share

Section 1: Payments Primer

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In recent years, payments companies have evolved to provide more products to merchant clients, with recent products and service offerings including business management software, marketing tools and analytics, as well as mPayments (mobile payments)

Small Merchants

Market

Large Merchants

Mid-Sized Merchants

Products / Services

Indirect / Traditional ISO

Direct Sales

Agent Banks

Telesales

POS Developers / ISVs and VARs

Trade Associations / Other

Sales Distribution

Check Processing & ACH

Pre-Paid Services & Loyalty Solutions

Credit / Debit Card Processing

Virtual/Physical POS Terminal

Sales

Grocery / Supermarkets

Restaurant (Table / QSR)

Hotels

Representative Verticals

Specialty / Mass Retail

Convenience / Fuel

Healthcare

Property Management

Education

Data Security / PCI

Retail Direct Selling

Business Management

Software

Marketing Tools & Analytics

Section 1: Payments Primer

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Electronic payments companies are the driver of commerce in the U.S.

In 2015, there will be

$4.9 Trillion of Volume on Cards in the U.S.

$408 Billion Per Month

$13 Billion Per Day

$560 Million Per Hour

$9 Million Per Minute

$155 Thousand Per Second

In 2015, there will be

82 Billion Transactions on Cards in the U.S.

7 Billion Per Month

224 Million Per Day

9 Million Per Hour

156 Thousand Per Minute

2.6 Thousand Per Second

U.S. Consumer Spending:

$10.5 Trillion (2015)

For context

U.S. GDP:

$16 Trillion (2015)

Federal Government: collected $2.5 Trillion in taxes

(2012)

Section 2: The Opportunity & Data Metrics

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The growth opportunity in the U.S. consumer payments processing market continues to be attractive

*Electronic payments in chart above include credit, debit, remote, prepaid transactions, EBT cards, and preauthorized **Cash and check in the chart above include checks (only direct payments), cash (cash advances/withdrawals on credit/debit cards and checks written to obtain cash), money orders, official checks (cashier’s checks, teller checks and certified checks) and travelers cheques ***Consumer Payments are defined as the purchasers component of personal consumption expenditures

U.S. Consumer Payments Breakdown: Electronic vs. Cash/Check

$0

$2,000

$4,000

$6,000

$8,000

$10,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Electronic Payments Cash and Check

2015 Cash & Check: Market Opportunity 2015: $3 Trillion

2005 Cash & Check: Market Opportunity: $3.4 Trillion

2005 Total of Electronic Payments: $3.4 Trillion

2015 Total of Electronic Payments : $7.2 Trillion

$ Billion

+8% CAGR

-1% CAGR

Section 2: The Opportunity & Data Metrics

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Total Visa/MasterCard credit & debit payment volume is estimated to reach nearly $4 trillion by 2015

U.S. V/MC Payment Volume Trends & Projections

Source: Visa & MasterCard earnings releases 2012 data annualized YTD Sept. 2012 totals 2013, 2015 trended using 2012-2016 CAGR

$674 $743 $808 $824 $764 $809 $889 $959 1,042 $1,237

$1,405

$554 $643

$726 $817 $883 $1,054

$1,152 $1,096 $1,155

$1,217

$1,283

$472 $509

$548 $547 $477

$479

$508 $524

$567

$613

$663

$146

$216

$269 $309 $327

$333

$393 $443

$484

$529

$578

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Visa Credit Visa Debit MasterCard Credit MasterCard Debit

$1,846

$2,111

$2,351 $2,497 $2,451

$2,675

$2,942 $3,021

$3,248

$3,596

$3,929

(Volume in $ billions, debit is signature and PIN)

+8% CAGR

Section 2: The Opportunity & Data Metrics

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The chart below displays the performance of a $100 investment in an index of selected payments companies which represent the “TSG Payments Index” - this index is calculated on a value weighted basis using market capitalization and is compared to the S&P 500 which is also calculated using the same methodology. A $100 investment in the TSGPX in Q1 2007 would now be valued at $346, as compared to $146 if invested in the S&P 500.

The chart above displays the performance of $100 investment in an index of the following listed companies which represent the “TSG Payments Index” - this index is calculated on a value weighted basis using market capitalization and is compared to the S&P 500 which is also calculated using the same methodology. This analysis does not include affects of re-invested dividends. While some of the companies listed in TSG’s Payments Index do not meet the requirements to be a S&P 500 listed company (S&P listed companies have a market cap of at least $3 billion), the S&P 500 served to be the best comparable index to TSG’s Payments Index since it is one of the most commonly used benchmarks for the overall U.S. stock market. In fact, many consider it to be the definition of the market. The companies included in TSG’s Payments Index met the criteria that at least 50% of their revenues were produced from electronic payments products or services. Ingenico and Gemalto have been removed due to inclusion of NetSpend and Cardtronics as well as their being traded on non-US exchanges. As of Q4 2011 Fundtech has been removed due to an acquisition and Tier Technologies’ name has been changed to Official Payments. Vantiv was added to the index as of Q1 2012. 3PEA International was added in Q1 2013. LML Payment Solutions and Transaction Network Services were removed as of Q1 2013 due to acquisition.

Section 2: The Opportunity & Data Metrics

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U.S. Merchant Breakdown: Acquiring Opportunities – 2015 est.

Sources: Morgan Stanley estimates and TSG estimates

National

Merchants > $1 Billion

Annual Bankcard Volume

Large

Merchants $1 Million - $1 Billion

Annual Bankcard Volume

Mid-Sized

Merchants $100,000 - $1 Million

Annual Bankcard Volume

.005%

Merchants

2%

Merchants

12%

Merchants

50%

Sales Volume

30%

Sales Volume

12%

Sales Volume

25%

Revenue

30%

Revenue

5%

Revenue

Estimated Number of Bankcard Accepting U.S. Merchants: 8 - 10 Million

Total V/MC Bank Card Sales Volume: $3.9 Trillion

Total Acquirer Net Revenue: $11 Billion

Small

Merchants < $100,000

Annual Bankcard Volume

86%

Merchants

8%

Sales Volume

40%

Revenue

Small and medium size merchants make up the majority of the opportunity for most merchant acquiring companies

40% of the *net revenue opportunity *Net Revenue = Gross Revenue + Other Income – Cost of the Trans.

Section 2: The Opportunity & Data Metrics

If you’re not doing payments, you’re missing out on big money. If you are doing payments, do what it takes to get all your customers processing with you.

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In the recent past, a deluge of inside changes have affected the merchant acquiring ecosystem

Consolidation

Mobile

Technology Companies Compete

eCommerce

M e r c h a n t A c q u i r i n g

Section 3: Trending

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Trend: Consolidation – or lack thereof

1988 1997 2005 2013

Company Volume

($M’s)

Share

% Company

Volume

($M’s)

Share

% Company

Volume

($M’s)

Share

% Company

Volume

($M’s)

Share

%

Top 10

Acquirers

97,031 39% Top 10

Acquirers

407,624 66.7% Top 10

Acquirers

1,451,394 84.5% Top 10

Acquirers

$2,496,011 76.8%

Top 50

Acquirers

161,134 64.8% Top 50

Acquirers

594,662 97.3% Top 50

Acquirers

1,705,563 99.3% Top 50

Acquirers

$3,110,523 95.8%

All Bankcards 248,796 100% All Bankcards 611,039 100% All Bankcards 1,717,429 100% All Bankcards $3,248,568 100%

One of the continuing myths of the payment industry is that the industry is “Consolidating” to smaller and smaller group of “winners”

When compared to the make-up of the Top 10 Acquirers in 1988 compared to now – yes indeed the percentage of $ Volume controlled by the top 10 has gone from just 39% to more than 75% in 2013

Compare that though with 2005 – then almost 85% of the industry was in the hands of just 10 major acquirers.

Section 3: Trending

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Trend: Mobile Payments. Payments made via a mobile device in the world – 2010 – 2015 estimates

Source: IE Market Research

$240

$379

$600 $634

$670

$-

$100

$200

$300

$400

$500

$600

$700

$800

2011 2012 2013 2014 2015

11,161 13,204 15,622 18,482

21,866

0

5,000

10,000

15,000

20,000

25,000

2011 2012 2013 2014 2015

2.9%

3.1%

2.2%

3.8% 3.4%

% Mobile Payments

Global Consumer Electronic Payments $ Volume via Mobile Device 2011-2015 est. (in billions)

Global Card Payments $ Volume 2011-2015 est. (in billions)

Section 3: Trending

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Trend: Technology Companies Competing

Square and PayPal’s influence has been immense in that they helped created a new, card accepting micromerchant market – see chart below. With this new market, merchant acquiring is not a zero sum game.

The U.S. Merchant Market (Est.)

150 Largest Merchants

100,000 Large Merchants

250,000 Medium Merchants

6.5 Million Small Merchants

25 Million Micromerchants

% of Visa & MasterCard Sales

Volume

50%

30%

12%

6%

<2%

Traditional Merchant

Market

New Merchant

Market

Square’s Market Share

(~2 million merchants)

Section 3: Trending

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Trend: Ecommerce

71%

18%

2%

1%

1% 1%

7%

Cards

Mobile wallets

Direct Debits

Mobile

Cash on delivery

Bank transfers

Other

eCommerce Share By Payment Type (U.S.)

8%

92%

eCommerce Sales

Other Bank CardPayment Methods

eCommerce Share of Bank Card Volume (U.S.)

Section 3: Trending

The ecommerce space is an important and growing opportunity in the U.S. market. Currently, 8% of Visa/MC volume is online. To compete, merchant acquirers have to have an ecommerce offering.

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In the recent past, a deluge of outside influences have changed the merchant acquiring ecosystem

Data Security Breaches

EMV

Emerging Purchase Model

M e r c h a n t A c q u i r i n g

Section 3: Trending

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Data Breaches Happen Frequently 1,054 breaches last year in the U.S. alone

Data Breaches Cost Millions $54.M is the average cost per company

Most Breaches Could Have Been Prevented 89% of breaches analyzed by the Online Trust Alliance could have been avoided with basic controls and best practices

Primary Breach Targets Impact The Largest Merchants

45% 24% 9%

Retail Food & Beverage Hospitality

2013 broke the record (by nearly double) for the most records exposed: 822 million globally

The recent Target breach ranked only fifth in breach history for total records exposed

The average breach cost per record was $188 in 2012

78% of initial intrusions are rated as low difficulty

Trend: Data Breaches

Section 3: Trending

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EMV

Major card brands support EMV because it: • Reduces criminal attractiveness of card fraud. • Reduces chargebacks due to counterfeit or stolen cards. Fewer chargebacks

save merchants time and reduce the frustration typically involved with the chargeback process.

• Helps merchants avoid the potential liability for card-present card fraud. • Creates common cardholder experience. Moving to the EMV standard in the

U.S. will make it easier for U.S. travelers using cards abroad. Likewise, international travelers have peace of mind when conducting transactions in the U.S.

• EMV also helps usher in the new technology and capability for contactless transactions. EMV is the stepping stone to the future of payments due to its dynamic data authentication (i.e. contactless, mobile).

What Is EMV?

Source: EMVCo; Smart Card Alliance; American Banker; Federal Reserve

EMV, named for the coalition of Europay, MasterCard, and Visa (the EMV Coalition or EMVCo) that developed the specifications for the system in the 1990s, improves safety through better card security and improved standards. EMV has become the world-wide standard and both U.S. neighbors, Canada and Mexico, have EMV mandates impacting U.S. multi-national retailers.

Section 3: Trending

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EMV Fraud Liability Shift Explained

October 2012 April 2013 October 2013 April 2015 October 2015 October 2016 October 2017

Visa

PCI audit relief

Acquirers & processors required to support merchant acceptance of EMV

transactions

3rd party ATM acquirer

processors & sub-processors required to

support EMV data

Card-present counterfeit

liability takes effect excluding automated fuel

dispensers (AFD)

ATM liability shift

Card-present counterfeit liability

takes effect for automated fuel

dispensers

MasterCard

Account data compromise (ADC) relief

(50%)

ADC relief (95% - 100%)

ATM liability shift

Lost or stolen

liability shift for

AFD

Lost or stolen

liability shift

Discover PCI audit relief

American Express

Each card network's EMV deadline varies slightly, but these are the broad requirements put forth for their implementation: • April 2013 - Merchant acquirers and card processors had to upgrade their systems to be able to

process chip card transactions. • October 2015 - Liability for magnetic stripe card fraud is shifted to the entity that does not support

EMV technology. The broad idea is that the merchant, issuing bank, or credit card processor that's not on board with EMV would bear the responsibility when fraud occurs.

• October 2017 - The liability shift goes into effect for organizations that sell fuel. These businesses have much more expensive payment terminals and have more time to upgrade.

Liability Approaching

Source: EMV Migration Forum; TSG Analysis and Commentary; Federal Reserve; Retail Info Systems (RIS); Card brands

Section 3: Trending

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Who is ready (and who is not) for the transition to EMV in the U.S.?

Section 3: Trending

34% 39% 44% 47% 53%

0%

50%

100%

Oct. 2015 Dec. 2015 Jun. 2016 Dec. 2016 2017

There is an abundance of estimates from a variety of research firms concerning U.S. EMV terminal migration

U.S. EMV Terminal Penetration Forecasts

Source: TSG Analysis and Commentary; Aite; Javelin; EMV Migration Forum; BI Intelligence; Mercator

The Strawhecker Group: U.S. EMV Terminal Penetration (SMB centric survey)

14%

28%

59%

73%

90%

53%

71%

84%

17%

38%

58%

75%

14%

35%

57%

70%

87%

15%

32%

49%

68%

84%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016 2017

Aite Javelin EMV Migration Forum BI Intelligence Mercator

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Who is ready (and who is not) for the transition to EMV in the U.S.?

Section 3: Trending

Three key impediments that are stalling EMV at small merchants:

• Limited awareness

• Absence of a clear ROI

• A story they've heard before

EMV: Not Coming To A Small Merchant Near You

There is a troubling reality for small-merchant EMV take-up. • 4% of merchants with fewer than 20 employees have implemented EMV-compatible terminals. • 72% have no plan in place to deploy the technology by the October 2015 liability shift.

4% 24%

35%

37%

Yes

No, but plan to do so prior to October 2015

No, but considering acceptance with no definite time frame

No, and no plans to do so

EMV Deployment at Merchants With Fewer Than 20 Employees

Source: Yankee Group

Where is the Opportunity?

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The Value Added Benefits of EMV

Section 3: Trending

The Time is Right • Smart phone usage and technology. Given that phone manufacturers are gearing up to include NFC

capabilities, and the rapid replacement rates of smart phones by U.S. consumers (every 1.7 years on average), it is predicted that over 50% of smart phones will be NFC enabled by 2015.

• Growing momentum of contactless. Many major retailers have already implemented contactless payments. While the technology being deployed in the U.S. is not fully dynamic, the growth in usage by consumers indicates that the contactless payments will grow even more significantly in the more feature-rich, dynamic mobile world.

• Changing shopping behaviors. The number of consumers using online shopping aids, such as price comparison and product review sites, is growing rapidly. However, there continues to be a missing, seamless link with the payment at POS and online.

• The new ecosystem will increase consumer usability and spend. Consumers are likely to use their EMV-enabled devices more frequently and enthusiastically when they have a clear understanding of the benefits - particularly around fraud prevention. EMV and the bridge to mobile will allow cardholders to experience interactive, real-time experiences such as location-based services, online reviews and price comparisons. The impact of consumers’ perception can be both significant and positive. In Latin America, for example, card usage following EMV migration increased with the perception of stronger payment security.

EMV Lays The Foundation For A New Payment Ecosystem In The U.S.

Source: TSG Analysis and Commentary; NFC Times; RIS; Edgar, Dunn & Company

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The Value Added Benefits of EMV

Section 3: Trending

Niche Segmentation Of A Customer Base And Long-term Cost Reduction • With the new ability of marketing programs to be rolled out faster than ever before, and the capability to mine

customer data, banks are expected to target ever-narrower customer segments to drive customer loyalty.

Flexibility To Create New Competitive Card Programs With A Fast Time To Market • EMV cards can provide new revenue sources when they are managed by an in-house chip management system.

New payment - and non-payment - services can be launched and delivered to the cards during personalization or post-issuance.

Expansion In The Types Of Payment And Non-payment Products That Can Be Supported On A Single Card Through Multi-Application Issuance And Lifecycle Management • Multi-application management, essentially the ability to offer multiple

products on one chip-based card, has long been touted as a progressive outcome of EMV adoption. FIs around the world have not taken advantage of this potential. It is expected that the upcoming adoption of EMV and the marketing prowess of U.S. FIs will create an environment where multi-application cards will be exploited to their full potential.

Source: TSG Analysis and Commentary; Bank Info Security; Accenture

EMV Lays The Foundation For A New Payment Ecosystem In The U.S.

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EMV – The Bottom-Line

Section 3: Trending

An open, collaborative approach by all industry stakeholders will be the best way to develop a comprehensive, thoughtful and innovative standard for the “next generation” secure payment acceptance environment/infrastructure. What’s more, timelines must be realistic for all stakeholders including issuers, acquirers, hardware manufacturers and merchants.

Collaboration Is Needed

Source: TSG Analysis and Commentary; Bank Info Security; Accenture

Sharing The Costs • The costs of conversion are considerable, and will be borne by

merchants and FIs. As in prior EMV rollouts in other countries, if the card networks were to help share the cost of the technological transition, it could drive much faster adoption in the U.S. The U.K. and Australian markets also were given interchange concessions by the card networks, which helped share the costs of purchasing and deploying new hardware and software that will benefit many stakeholders.

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Trend: The Emerging Purchase Model

Awareness

Consideration

Purchase

As consumers AND merchants embrace the emerging purchase model, the tipping point is closer to being reached

Section 3: Trending

Traditional Purchase Model

The Omni- Channel Shopper

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The Future Of Payments

Card Brands

Card Readers & Apps

P2P / eCommerce

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Technology Companies

The Future Of Payments

Technology companies that have the potential to be disruptors in the payments space:

• New entries into the market have the potential to be very disruptive, but lack volume, acceptance and market share has limited any appreciable impact to traditional payment models

• Often more marketing buzz than business impact

• Historically focused on technology focused consumers for P2P and P2B transactions

• Other Technologies to watch out for: Bluetooth LE and beacons

• Apple Loyalty • Potential to be

Disruptive • NFC • iPhone 6 and Apple

Watch • Secure • Standard Rails • Limited Use • < 2% Merchants

• $6B Self Valuation • Mass Aggregation • Simple Boarding • Not Profitable • Underwriting • Poor Security • No Customer Service • Evolving Model

• User Base • Local Register • Backed by

Amazon • Incentives • Billing &

Recurring Payments

• 152 M Customers

• Global • Brand • $27 B Mobile • Home Depot • Aged Platforms

• Developer Preferred Interface

• Recurring Billing • Global • Secure

• Cash Based Service • <$10 Free • Flat Fee • Small (60 Employees) • Unique Approach • No Card Brand

Interactions • US Only

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www.TheStrawGroup.com / www.PaymentsPulse.com

Question & Answer

About TSG The Strawhecker Group (TSG) specializes in providing financial institutions, merchant acquirers, card associations, ISOs, processing companies, large merchants, and the investment community with advisory services to maximize their growth and profitability.

TSG is also a resource for consumer spending data, industry research, benchmark studies, and developing trends.

For more information please visit www.TheStrawGroup.com.

Chuck Fillinger, Senior Associate TSG / [email protected]

402-964-2617

Mention Retail IT to get 15% off TSG’s EMV

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