Will growing smart phone adoption, pending debit card regulation and the news of budding consortiums around near field communication (NFC) herald the downfall of magnetic stripe payment cards and a reimagining of the payments landscape?
As terminals, smart phones came roaring into the fore at the end of 2009, when a number of prominent payment providers unveiled downloadable terminals aimed at mobile merchants - among the first ones were Square, created by Twitter Inc. co-founder Jack Dorsey, and PAYware Mobile from VeriFone Inc. Those offerings were soon followed by an avalanche of similar offerings created by an array of technology companies, big and small.
Smart phone-based terminals have seen significant, though not earth-shattering adoption levels so far. However, a report from Mercator Advisory Group, Squares and Sleds: Wireless POS Plays a Smarter Game, predicts adoption will jump in the coming years. The August 2010 report forecasts more than 1.4 million merchants will accept cards with smart phone terminals by 2014, up from a number that is well under 100,000 right now, according to the report's author, George Peabody.
For merchants, smart phone payment acceptance offers a number of potential advantages. The terminals are relatively cheap, easy to use and, sources say, as efficient at processing credit cards as conventional wireless terminals. They are also, of course, mobile, meaning they can be taken to tradeshows and off-site jobs, as well as used for line busting.
Finally, sources say, smart phones lend themselves to innovation, making them the ultimate product for add-ons. Whereas conventional terminals usually rely on a narrow channel for upgrades and services, smart phones have the advantage of developers working the world over to create new software enhancements, many of which can be incorporated with an easy download.
"With purpose-built wireless devices, they were a little more challenging to use when you wanted to integrate into a more robust system that had inventory and SKU management and everything like that," said Scott Henry, Director of North America Product Marketing for Verifone. "It was a payment-specific device. Using a device such as the iPhone, the BlackBerry or any other, you can have third-party developers that create other applications for the industry, and it really opens the doors for companies like ours to enter new markets."
Steve Kimberling, Executive Vice President of Sales and Marketing for the Calif.-based ISO Eureka Payments LLC., which specializes in boarding mobile merchants, said purpose-built wireless terminals and smart phone terminals aren't always mutually exclusive.
He said that, while smart phone terminals have opened new markets of merchants who could not previously afford the costs of card acceptance, they are also finding an audience among clients who are using them as adjuncts to their purpose-built devices or online gateways. Among them are e-commerce merchants looking to add revenue with periodic in-person transactions, Kimberling said.
"Years ago, the trend was, you have a retail store and now you want to go online to make additional money," he said. "What we're seeing now is folks who are predominantly Internet-based saying, 'Hey, I can occasionally attend this specific event and have the opportunity to make more with face to face transactions as an add-on piece of business.' So I think it's a reverse-flow from what we saw years back. It's Internet merchants augmenting their sales in retail-type environments."
Yet, while Kimberling agreed that smart phones lend themselves to more complex back-end systems used for data management and marketing, he also said the lack of across-the-board compatibility is a problem with some types of payment acceptance software. That issue, he said, has proven to be the biggest stumbling block to wider adoption.
Many in the industry expect compatibility issues will likely be ironed out with time; some software companies are already working to address them. Perhaps the best example is ROAM Data Inc., which has developed a middleware product that makes ROAM's payment technology "agnostic," meaning it is compatible with any smart phone, according to William Graylin, ROAM's Chief Executive Officer. Graylin said the wide growth of smart phone payment acceptance hinges on developing technology that is "scalable" and capable of being adopted by mass numbers of users across various types of businesses and platforms.
"People who just build an iPhone application will quickly figure out that it's not enough," Graylin said. "They need a mobile strategy that allows them to scale across mobile devices and keep up when devices change. It can't be a static application fixed to a particular hardware device."
Another issue around smart phone payment acceptance is security. Because smart phone terminals are relatively easy to construct and market, entrepreneurs without much payment experience are popping up in droves with the newest offering.
Although smart phone terminals are subject to the same Payment Application Data Security Standard (PA DSS) provisions that apply to all payment acceptance devices, sources say the glut of mobile offerings on the market include quite a few that aren't PA DSS certified.
"When you think of the iPhone, it has opened new markets, so everybody and their brother thinks they can do payments now," Henry said. "What they don't understand is there are a lot of companies that have spent the better part of 15 or 20 years hardening these devices, and we know how to do it very well."
Henry added that resellers who partner with noncertified terminal providers run a particularly high risk. "If data is compromised, believe you me, the card associations are going to find out who's responsible," he said. "Chances are that a small operation working out of a garage that put up a payment application and didn't get it properly certified isn't going to be the one holding the bag, so all the resellers need to scrutinize what they're selling."
Rising in concert with the use of smart phone payment acceptance among merchants are smart phone payments among consumers. And here the potential for growth is even more precipitous. According to Mobile Commerce, a report from ABI Research, consumers in the United States spent $1.2 billion in 2009 using their mobile phones, up from $396 million in 2008. ABI also predicted that mobile commerce would account for 8 percent of all e-commerce shopping worldwide by 2015.
Part of that shift is being driven by the migration of key payment players to the mobile space, according to Brent Samuels, Senior Consultant for payments industry-focused First Annapolis Consulting. Those include payment applications from such companies as PayPal Inc. and Google Inc., as well as shopper assistance programs from major retailers.
"Look at what Target has done with their smart phone application," Samuels said. "It's a pretty integrated app they've already created that allows consumers to figure out what hot stuff is on sale, create shopping lists they can manage in real time to navigate through the stores - it's pretty cool stuff."
Yet, while mobile commerce remains almost exclusively Internet-based in the United States, the real game changer would be its shift into the POS market. Presumably, that shift would entail the long-awaited emergence of NFC, whereby consumers could make payments at the POS by simply selecting a payment option on a smart phone and then pointing that phone (or smart card) at an NFC terminal, which would register the payment via the transmission of radio waves.
While there is plenty of skepticism about a service that has long struggled to gain a foothold in the United States, many say rising smart phone adoption in the coming years may prove a flashpoint in NFC's quest for acceptance.
"You can look at smart phones as finally having delivered a level of technology that works with NFC and that consumers have confidence will work," Samuels said.
Another indication of a turning tide is the involvement of payment players in the United States that have long sat on the sidelines. Within the last few years, a number of major retailers have incorporated NFC acceptance equipment in the anticipation of its rollout, including Wal-Mart Stores Inc., Target Corp., Home Depot U.S.A. and McDonald's Corp., according to Mohammad Khan, President and founder of NFC technology firm ViVOtech Inc.
Meanwhile, two reports have surfaced in recent months of major consortiums among banks, mobile providers and card brands to test the use of smart phones at the POS. On On Aug. 2, 2010, Bloomberg L.P. reported a partnership between AT&T, Verizon, and Discover Financial Services, among other firms, to pilot NFC in a handful of U.S. cities; on Aug. 19, Reuters reported a separate consortium between Bank of America Corp. and Visa Inc., to pilot contactless payments in the New York area. It has since been reported that Wells Fargo & Co. and U.S. Bank have signed on to that endeavor as well.
Such activity may be creating what payment consultant Steve Mott calls "a perfect storm" that will propel NFC into the mainstream, with smart phones replacing plastic cards as the main drivers of electronic payments. Mott argues that NFC will not only change the way consumers pay, but also revolutionize the entire payments world by giving rise to a chip and PIN system like the Europay, MasterCard and Visa (EMV) system used across Europe.
"We're at a point where we can no longer cling to the mag stripe," Mott said. "Just about everybody, including, I think, the bankcard associations, have had it with the mag stripe, and the only people stopping the progress of civilization are the big banks. Now it's a national security issue. When al-Qaida's using stolen credit card credentials they get on websites for less than a dollar, we're an embarrassment.
"Especially if we go to an EMV system with a PIN, this would be safer than any payment system we've ever done. Everything would be done digitally, everything would be done over protected networks and it would all be encrypted."
If, as Mott predicts, NFC payments replace mag stripe cards, how the new profit arrangement will work is anyone's guess.
One thing is almost certain, however: the entry of new players like mobile carriers and over-the-air-provisioning firms into the payments space, coupled with the new regulation of debit card interchange (which many predict will be followed by the regulation of credit card interchange) would compel payment providers to look for profit sources outside of the per-transaction fee.
But Mott feels there is opportunity aplenty in the "two-way" capability that NFC can deliver - where merchants and their service providers will be able to build gift, loyalty and other marketing programs in increasingly creative and sophisticated ways, using things like the global positioning system, bar code scanning and other customer management tools that drive consumer spending. It is with these devices that the money will flow and the full power of smart phones will become known, Mott noted.
"Two-way NFC allows, in effect, the merchant and buyer to interact electronically in real time, with location awareness, with security and with privacy as the consumer specifies," Mott said. "And incentives can be provided by any of those people - banks, carriers, merchants, third parties - to enhance and promote transactions, for which the merchant would gladly pay because he's getting something tangible he didn't have before. Most of the money to be made won't be because of the payment capability but because of the new economics of the system. That will involve improving the convenience and gratification of the buyer-seller interaction."
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