Monday May 26, 2014

Why Haven’t NFC Payments Taken Off?

With the EMV 2015 milestone approaching rapidly, there’s been renewed interest in smartcards, those credit cards with an embedded computer chip.  Back in 1996 I was working for a vendor helping Visa introduce a stored-value smartcard to the US.  Visa Cash was debuted at the 1996 Olympics in Atlanta, and I firmly believed it was the beginning of a cashless society.  (I later worked on MasterCard’s system called Mondex, from the UK, which debuted the following year in Manhattan).

But since you don’t have a Visa Cash card in your wallet, it’s obvious the project never took off.  It was convenient for consumers, faster for merchants, and more cost-effective for banks, so why did it fail?  All emerging payment systems suffer from the chicken-and-egg dilemma.  Consumers won’t carry the cards if few merchants accept them, and merchants won’t install the terminals if few consumers have cards.

Today’s emerging payment providers are in a similar pickle.  There has to be enough value for all three constituents – consumers, merchants, banks – to change the status quo.  And it’s not enough to exceed the value, it’s got to be a leap in value, because people generally resist change.  ATMs and transit cards are great examples of this, and airline kiosks and self-checkout systems are to a lesser extent.

Although Google Wallet and ISIS, the two leading NFC payment platforms in the US, have shown strong commitment, there’s been very little traction.  Yes, I can load my credit card number into my phone then tap to pay, but what was the incremental value over swiping my old card?  For it to be a leap in value, it has to offer more than just payment, which I can do very easily today.  The other two ingredients are thought to be loyalty programs and digital coupons, but neither Google nor ISIS really did them well.

Of course a large portion of the mobile phone market doesn’t even support NFC thanks to Apple, and since it’s not in their best interest that situation is unlikely to change.  Another issue is getting access to the “secure element,” the chip inside the phone where accounts numbers can be held securely.  Telco providers and handset manufacturers own that area, and they’re not willing to share with banks.  (Host Card Emulation, which has been endorsed by MasterCard and Visa, might be a solution.)

Square recently gave up on its wallet, and MCX (the group of retailers trying to create a mobile payment platform) is very slow out of the gate.  That leaves PayPal and a slew of smaller companies trying to introduce easier ways to pay.

But is it really so cumbersome to carry and swipe (soon to insert) a credit card?  Aren’t there more important problems to solve in the retail customer experience?  Maybe Apple will come up with some novel way to use iBeacons and fingerprint identification to make payments, but for now I think we need to focus on upgrading to Chip-and-PIN and tightening security.  In the meantime, NFC payments will continue to struggle.

Wednesday Aug 01, 2012

EMV on its way to the US

At a past job I recall slaving away in Mastercard's facility in Purchase, NY testing my implementation of a stored value system called Mondex when the project manager walked in and told me to stop working so hard.  I was completely confused as there were deadlines to meet, but a few days later Mastercard announced is was dumping Mondex in favor of something called EMV.  That was over 15 years ago and EMV has yet to take hold in the US -- but its coming soon.

EMV is simply a standard for payments made using smartcards, which look like standard credit cards but have integrated circuits embedded.  You can think of that chip as a tiny computer that can talk with the POS to perform encryption and authentication tasks to help prevent fraud.  Chip-and-PIN is the UK's implementation of EMV.

Last year Visa announced its intention to transition the US from mag-stripe to EMV cards with a target of October 2015.  Mastercard, Amercian Express, and Discover have also aligned to that target.  This means that retailers need to upgrade their POS hardware to be able to accept contact (insert the chip card into a read) and contactless (wave the card near a reader) cards.  Acquirers must have their software updated by April 2013.

To encourage retailers, the card brands are providing both a carrot and a stick.  When 75% of a retailer's transactions are chip based, it no longer has to annually perform the PCI certification (yeah!).  However, after the deadline acquirers and retailers will take on the liability of non-chip card transactions (boo!).

Contactless chip cards use a technology called NFC to communicate with the reader.  In this case the chip can be embedded in a card or it can also be inside a smartphone.  Therefore, by adopting EMV hardware retailers will also be ready to accept mobile payments like Google Wallet and Isis.  Those payment systems include the added benefit of combining loyalty cards and digital coupons alongside payment data.  We're still waiting to see if Apple includes NFC in its next generation iPhone, but their Passbook concept is a good sign.

Here's some free advice:

  • Discuss EMV with your acquirer (and payment switch vendor) right away so you understand their roadmap.
  • Plan to upgrade your existing payment terminals to meet EMV requirements ASAP.  All the major payment terminal vendors have solutions.  Consider if you need network-addressable terminals (ones connected to your LAN).
  • Consider also participating with Google and Isis in their NFC programs.  They have pilots running in several cities with aggressive expansion plans.
  • Work with your POS vendor to understand any changes required to integrate the new payment terminals, but also to support value-added features like loyalty and digital coupons.
  • Discuss lessons-learned with peers that have already gone through the EMV migration in Europe.

This transition away from mag-stripe cards will not only reduce fraud, but there's an opportunity to use the technology to improve shopping experiences.  There will be pain along the way, but we'll all benefit from this move in the long-run.

About


David Dorf, Sr Director Technology Strategy for Oracle Retail, shares news and ideas about the retail industry with a focus on innovation and emerging technologies.


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